US: Markets could drive Treasury yields into negative territory – Charles Schwab

Kathy Jones, Chief Fixed Income Strategist at Schwab Center for Financial Research, consider that is a posibility that US yields could turn negative. She considers different alternatives to negative yields. 

Key Quotes: 

“We believe that the Federal Reserve is not in favor of setting the federal funds rate at a negative yield. However, it is possible that Treasury yields could fall below zero in the event of a steep or prolonged downturn or recession.”

“The market expects that the Fed will keep policy on hold for the next year or two. If expectations for the Fed to start raising rates get pushed even further into the future, then yields for bonds with maturities of two years or more could fall below the federal funds rate.”

“We don’t suggest that investors purchase bonds with negative yields. However, investors may end up holding them at some point if the economy continues to weaken or flight-to-safety Treasury buying intensifie.”

“We see the potential for some Treasury securities to provide negative yields. If that happens, we believe investors should consider alternatives, like bank certificates of deposit (CDs) or highly rated corporate or municipal bonds. However, keep in mind that even highly rated corporate or municipal bonds have higher risks than Treasury securities. If short-term Treasury yields do in fact dip below zero, you can explore other cash solutions that might still offer positive yields.”