Negative T Bill Rates?
It Can Happen We normally assume that interest rates must always be positive. Negative interest rates would imply that you are willing to pay more for a bond today than you will receive for it in the future (as our formula for yield to maturity on a discount bond demonstrates). Negative interest rates therefore seem like an impossibility because you would do better by holding cash that has the same value in the future as it does today. Events in Japan in the late 1990s and in the United States during 2008 during the global financial crisis have demonstrated that this reasoning is not quite correct. In November 1998, interest rates on Japanese six month Treasury bills became negative, yielding an interest rate of –0.004%. In September 2008, interest rates on three month T bills fell very slightly below zero for a very brief period. Negative interest rates are an extremely unusual event. How could this happen? As we will see in Chapter 4, the weakness of the economy and a flight to quality during a financial crisis can drive interest rates to low levels, but these two factors can’t explain the negative rates. The answer is that large investors found it more convenient to hold these Treasury bills as a store of value rather than holding cash because the bills are denominated in larger amounts and can be stored electronically. For that reason, some investors were willing to hold them, despite their negative rates, even though in monetary terms the investors would be better off holding cash. Clearly, the convenience of T bills goes only so far, and thus their interest rates can go only a little bit below zero.