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 why investors would buy treasury bonds with negative rates.

However, as negative interest rates are basically in uncharted territory, analyze and evaluate around 200 words whether yield curve analysis is still valid.

Answer 1

ANSWER OF THIS QUESTION IS BELOW:

This is how a negative rate policy works alongside some of its potential pitfalls:

WHY HAVE SOME CENTRAL BANKS ADOPTED NEGATIVE RATES?
During the global financial crisis of 2008-09, many central banks cut interest rates close to zero.

With their economies still struggling in the years that followed, policymakers in the euro zone, Switzerland, Denmark, Sweden and Japan allowed rates to fall to slightly below 0 per cent.

The coronavirus pandemic has now put pressure on central banks to pump even more stimulus into their economies.

The US Federal Reserve, which had managed to push up borrowing costs in recent years, cut rates back to just above zero but has signalled it does not intend to go further.

The BoE cut its Bank Rate to a record low of 0.1 per cent in March and has said it is ready to do more to help the economy, probably most immediately by buying more government bonds.

But new governor Andrew Bailey has sounded less opposed to the idea of negative rates than his predecessor Mark Carney and the BoE's chief economist Andy Haldane said it was something being considered.

Investors are betting the BoE might go negative around the end of this year.

IT WORKS LIKE
Under a negative rate policy, banks and other financial institutions are required to pay interest for parking excess cash -- beyond what regulators say they must keep on hand for safety reasons -- securely with the central bank.

Avoiding the charges is an incentive for banks to use their money to lend more to businesses and consumers, helping growth.

The ECB introduced negative rates in 2014. Its deposit rate is currently -0.5 per cent.

The Bank of Japan went negative in 2016, mostly to prevent a strengthening yen from hurting its export-heavy economy. The BOJ uses aggressive asset purchases to guide short-term rates to -0.1 per cent and the long-term rate to about zero.