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February 3 2016

How low can you go?

The Bank of Japan (BOJ) dove into the negative interest rate rabbit hole last week when it dropped its benchmark interest rate to minus 0.1 percent. If you’ve been following Japan’s story, then you know the country has been struggling with deflation for almost two decades. The BOJ’s goal is to push inflation up to 2 percent. MarketWatch explained the idea behind negative interest rates:

“Central banks use their deposit to influence how banks handle their reserves. In the case of negative rates, central banks want to dissuade lenders from parking cash with them. The hope is that they will use that money to lend to individuals and businesses which, in turn, will spend the money and boost the economy and contribute to inflation.”

If the idea of negative interest rates sounds familiar, it’s probably because Europe has been delving into negative interest rate territory for a while. Several European central banks have adopted negative interest rate strategies, and about one-third of the bonds issued by governments in the eurozone offered negative yields at the end of 2015. It’s an unusual state of affairs – offering investors bonds that pay less than nothing. If investors hold to maturity, they get back less than their investment amount.

While negative rates may not be pleasing to bond buyers, U.S. stock markets were thrilled by the BOJ’s surprise rate cut. Major indices rose by about 2 percent on Friday.

Market performance was also boosted by a bad-news-is-good-news interpretation of weak fourth quarter U.S. gross domestic product (GDP) growth estimates. According to Reuters, slower growth in the U.S. economy raised investors’ hopes the Federal Reserve would hold back on future rate hikes.

Sources:
http://www.marketwatch.com/story/what-you-need-to-know-about-the-bank-of-japan-and-negative-interest-rates-2016-01-29
http://www.bbc.com/news/business-21137148
http://www.bloombergview.com/quicktake/negative-interest-rates
http://www.reuters.com/article/us-usa-stocks-idUSKCN0V71PB

  • Data as of 1/29/161-WeekY-T-D1-Year3-Year5-Year10-Year
  • Standard & Poor’s 500 (Domestic Stocks)0.018-0.051-0.040.0880.0860.042
  • Dow Jones Global ex-U.S.2.2-7-13.6-3.8-2.6-0.7
  • 10-year Treasury Note (Yield Only)1.9NA1.823.44.5
  • Gold (per ounce)1.44.7-12.4-12.6-3.57
  • Bloomberg Commodity Index2.6-1.7-21.8-18.2-14-7.8
  • DJ Equity All REIT Total Return Index1.1-3.4-8.27.510.16.3

*Indices are unmanaged and investors cannot invest directly in an index.
*Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
*S&P 500, Gold, Dow Jones Global ex-Us, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend).
*The DJ Equity All REIT Total Return Index does include reinvested dividends.
*All investments involve risk – coins and bullion are no exception. The value of the bullion and coins is affected by many economic circumstances, including the current market price of bullion, the perceived scarcity of the coins and other factors. Therefore, because both bullion and coins can go down as well as up in value, investing in them may not be suitable for everyone. Since all investments, including bullion and coins, can decline in value, you should understand them well, and have adequate cash reserves and disposable income before considering a bullion or coin investment.

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Bart A Zandbergen, CFP® is a Registered Investment Advisor with Optivest, Inc and a Registered Representative with Gramercy Securities, Inc. Investment advisory services are offered by Optivest, Inc. under SEC Registration and securities are offered through Gramercy Securities, Inc., member FINRA & SIPC, 3949 Old Post Road, Charlestown, RI, 02813, 800-333-7450.

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