Financial Hotspots: Negative Interest Rates Are Actually Deleveraging.

The central bank, which carries out the negative interest rate, hopes to encourage the capital to enter the real economy and further improve the level of leverage.

But in the view of HSBC, they are making a big mistake. Negative interest rates actually play a role in deleveraging.

HSBC analyst Anton Tonev wrote in a report that traditional theory holds that the central bank is the basic interest rate setter, and the negative interest rate is the product of low inflation and low economic growth.

But HSBC believes that negative interest rates may be the market's reaction to excessive leverage.

In April last year, Switzerland became the first country to issue a negative interest rate 10 year treasury bond. As at the end of last year, the euro area's newly issued treasury bonds had a negative yield of about 1/3.

If investors hold the maturity of these bonds, the funds recovered will be lower than the original investment, and the final repayment amount of the bonds issuers will be lower than the original loans.

In this case, the negative interest rate has actually become an effective tool for deleveraging, HSBC said.

The report reads:

We understand that one of the problems faced by this view is that

The purpose of negative interest rate is to encourage additional leverage, such as the example of the Swedish property market.

Most of the countries whose treasury bond yields are negative are either high in government debt or high in private sector debt (or both).

Historically, treasury bonds

It usually goes up, thereby hamper the issuance of more debt.

But this is not the case now. Why? We think that because of the high level of debt and the urgent need of deleveraging, the nominal returns of these countries are getting lower and lower in the negative range to encourage more debt issuance.

It also suggests that the market may think too much debt.

But credit creation is very important for the normal operation of the economy, and the vast majority of credit creation in developed countries is lending through the private banking system. If market demand for debt does not exist, then the whole credit creation process will collapse.

But there is also a natural limit on the size of debt that an economy can maintain.

After the financial crisis in 2008, the global economic growth slowed down, and banks were not only finding it difficult to find people willing to lend money, but also the public began to lower their leverage.

The situation in the United States and most developed countries after 2008 is similar to that in most of nineteenth Century and in the early twentieth Century. It is facing a deflationary environment and unable to boost the money supply to raise inflation.

In our view, the market has found a way to keep the monetary system running continuously, but this time it has not made the risk of debt soaring further.

After the 2008 financial crisis, the US liquidity declined.

HSBC believes that it is precisely because of this economic need, but it can not always pay interest, resulting in the emergence of this negative interest rate situation.

HSBC also wrote in the report that developed countries do not seem to be able to achieve economic growth and inflation that are enough to offset the soaring debt. In the absence of government policies, the market itself begins to cut its debt level through the negative interest rate of treasury bonds.