Today, about 35% of Eurozone government bonds are trading with negative yields. And roughly 10-20% globally. Already this year, several European central banks have moved their deposit rate into negative territory and around 30 central banks globally have cut their policy rates.
It may not come as a surprise that this ongoing low-yield environment has negative consequences. Households – that's everyday people like you and me – literally get 0% interest on their bank deposits (or worse, in the case of negative interest rates they are actually charged to keep their money in the bank). As Allianz points out, long-term investors are also victims of these unconventional government policies, referred to as “financial repression”. That includes insurance companies, as evidenced in the decline in running yields in recent years.
What may come as a surprise are the numbers. In our latest publication, "Financial repression: The unintended consequences", we present the cold costs of financial repression. For example, US savers alone have lost a massive USD 470 billion in (net) interest rate income since the financial crisis. Over the same period, US and EU insurance companies have foregone about USD 400 billion in yield income. Just one knock-on effect is that long-term investors are crowded out oft he market. Put simply, they are unable to pump savings into the real economy. That presents a very real risk for financial stability at large.
And know this: the longer such policies are used, the higher the potential unintended consequences will be. As Allianz puts it: "As long as the world remains in a debt crisis, financial repression isn't going away". What we can do is keep the dialogue going and make policymakers aware of the negative effects of their actions; the time has come to move from crisis management to crisis resolution.