When economic crisis strikes, central banks will cut their interest rates. The aim is to boost liquidity in the financial system and stimulate future growth. This time it’s no different, only somewhat more extreme. As Covid-19 has brought global activity to its knees, interest rates the world over are teetering at or below zero. We look at the brave new world of negative interest rates.

In a move which shocked financial markets and rattled investors’ confidence, the Fed slashed its lower policy rate to zero in mid-March. Bringing total cuts to 1.50% in a matter of weeks. In the UK, interest rates hit record lows just above zero. China is now the last major economy with significantly positive rates, just over 4%, despite a sequence of cuts in response to the outbreak of Covid-19.

In the eurozone and Japan, together representing a quarter of the global economy, rates have been negative for several years. The ECB pushed rates below zero in 2014 and the Bank of Japan followed in 2016. Both with a view to kick-starting bank lending and boosting inflation. In neither case was this very successful. Instead, negative rates distorted prices in financial markets and destroyed bank profits. They also hampered pension providers, who need income on their investments so they can pay their policyholders.

That brings us to the government bond markets, where pension funds would historically look for safe, predictable returns. In recent years, as the hunt for yield has become ever more desperate, bond prices have risen and yields have automatically fallen lower, even into negative territory. Largely because of TINA, or ‘there is no alternative’. It’s estimated that $14 trillion of global bonds now have a negative yield.

However, as equity markets tumbled over the past month, investors looked to raise cash from more liquid holdings. Bond yields rebounded pretty fast, as bond prices fell back again. Add in the huge fiscal support packages intent on stimulating growth in the future, and it’s no surprise that yields, particularly on longer-dated bonds, have climbed. Clearly the bond markets still have faith in the power of fiscal stimulus.