Money market rates continue to suffer and while serving their purpose they create imbalances

For those who invest in money markets in treasury bills concerning most of the developed economies, their returns i.e., the money market rates over the last decade have been and remain meager, and if we take into account inflation, for most of the period of the last decade, the rate appear negative. Money market rates or treasury bill rates are the rates at which short-term borrowings are effected between financial institutions or the rate at which short-term government paper is issued or traded in the market. Short-term interest rates are generally averages of daily rates, while are based on three-month money market rates where available.

Money markets for depositors and investors are indeed negative, especially in the last time period. As shown in the chart below, the net interest rate on US treasury bills on a monthly basis, due to the jump in inflation in recent months, is collapsing, as it has now fallen close to -5%. The truth is that we are experiencing, on the part of the holders of treasury bills in the US, probably the worst period of the last decades.

Indeed, as shown in the chart, from 1986 to the present, we observe that on a monthly basis, the net money market rate in the US initially became negative for a short period in 1993, and then returned to negative territory for a longer period, with the crisis in 2002 to 2005. This was followed by a period of positive returns, however, since 2008 the situation has changed significantly. Net negative interest rates in money markets were first recorded at the beginning of the 2008 financial crisis and since then for most of the following years. In 2019, the net interest rate in the money market seemed to have stabilized on positive ground, however, the pandemic quickly changed the economic conditions, with the result that the net interest rates returned violently to a negative level, while today, on the occasion of the explosive rise in inflation in recent months, they record the lowest net return in the last 35 years.

The good news is that the phenomenon of rapid inflation observed in recent months is considered to be temporary and therefore inflation on an annual basis will not exceed the targets set by the Federal Reserve. On the other hand, however, the authorities' intention to keep interest rates low remains and is expected to be maintained for some time to come. Jerome Powell pointed out, the US Federal Reserve will continue to provide support to the US economy in order to recover from the effects of the health crisis, which is why it kept interest rates unchanged at its level 0.0% - 0.25% which means that, there will be no increase in the yields of the bonds and therefore on the treasury bills in the immediate future.

Low interest rates globally will continue to be one of the main tools of the authorities to strengthen the economies of developed countries, while at the same time they are considered absolutely necessary to deal with the management of excessive debt faced by many countries and many businesses and households worldwide. The financial repression used by policymakers as the main methodology for dealing with the high government debt after the 2008 crisis will continue to be, for a long time, the main policy for dealing with high debts. Public debt has swelled even higher, now reaching excessive levels after the pandemic and therefore needs to be managed.  

Managing high debt will require high growth rates and mostly, keeping interest rates low so that indirect debt restructuring can be achieved, as the goal is, for a long time, inflation and growth can exceed interest rates. This means that those who have exposure to interest rate products such as deposits, treasury bills, bonds, are in fact those who are actively involved in the informal global debt restructuring that has been taking place since 2009. So, in fact the owners of interest rate products are these who more likely they will continue to get negative returns for a long time to come.

This situation, which has been observed since 2010, has had and will continue to have the effect of shifting capital to other forms of investment and trading, such as stock markets, commodities, and innovative products.

The good news is that with low interest rates, economies are driven to the economic growth. The bad news, however, is that this situation creates imbalances as businesses and economies are exposed to greater and sometimes to unnecessary risks and therefore overheating in the economic and business can be observed. Also, low interest rates mean more supply of money that can push the prices in commodities and products to higher levels thus leading to excessive inflationary pressures which means net interest rates will become even lower. This means that investors will move away from interest-rate products as there will be no substantial return on them, thus taking sometimes excessive risks even if otherwise they would not be willing to take.

The future of interest rate policy looks like a big challenge, as the balances that need to be created are extremely delicate and need a lot of attention from policymakers, so that their decisions do not trigger a new crisis. After all, a situation where many critical factors, such as interest rates, inflation, growth, and debt, are in imbalance, could easily create the conditions for the "butterfly effect". A phenomenon that has been proven to indeed, can overturn many of what we now take for granted.