Question

Study Negative interest rate (NIRP) or Zero interest rate (ZIRP) strategies, clarify following;

1) How does this affect the bond market?

2) Who wins and who loses in this environment?

3) Is it good or bad for the overall economy?

Answer 1

Please find below the answers for your reference:-

1) It affects the bond markets negatively by widening credit risks, reducing bond quality, tightening credit liquidity with higher financial burden on the banking system.

2) The winner is the investor and the loser is the banking system & the bond market as a whole.

3) On one had it reduces inflation but on the other hand it is giving a bad signal for the economy as it signifies negative yields and lower bond prices. It can put stress on the bond market & on the banking system as a whole by reducing asset quality drastically. It can also affect insurance companies and pension funds and disturb their expected returns thereby making it harder to honour the commitments to policy holders & pensioners.

answered by: anonymous