Question

With the Covid-19 crisis and its impact on the economy, analysts have speculated about
governments lowering their currently very low rates into negative territory. There are many reasons investors would buy treasury bonds with negative rates.

However, as negative interest rates are basically in uncharted territory, analyze and evaluate whether YIELD CURVE ANALYSIS IS STILL VALID for negative interest rates.

** DO NOT GIVE example why investors would buy bonds with negative rates. Just describe and evaluate whether YIELD CURVE ANALYSIS IS STILL VALID for negative interest rates.

Answer 1

the low level of interest rates in many developed economies, negative interest rates could become an important policy tool for fighting future economic downturns. Because of this, it’s important to carefully examine evidence from economies whose central banks have already deployed such policies. Analyzing financial market reactions to the introduction of negative interest rates shows that the entire yield curve for government bonds in those economies tends to shift lower. This suggests that negative rates may be an effective monetary policy tool to help ease financial conditions.

In many of the world’s advanced economies, central banks have set policy rates close to or below zero. Indeed, negative rates have been relatively common for an extended time in many countries

Under normal circumstances, nominal interest rates cannot fall below zero. The primary reason for this lower bound on nominal interest rates is that investors can choose to hold physical currency as a store of value rather than earn less than zero interest. However, in practice, the effective lower bound on nominal interest rates is somewhere below zero given the costs of transporting, storing, and insuring large quantities of cash and the risk of losing it to theft or fire.