GLOBAL Negative T-Bill Rates? Japan Shows the Way
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.
The Japanese 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%, with investors paying more for the bills than their face value. This is an extremely unusual event because no other country in the world has seen negative interest rates during the last fifty years. How could this happen?
As we will see in Chapter 5, the weakness of the Japanese economy and a negative inflation rate drove Japanese 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 six-month 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 holdingcash. Clearly, the convenience of T-bills onlygoes so far, and thus their interest rates can go only a little bit below zero.