Global central bank policy that has driven down interest rates to boost economic growth will cost investors about $163 billion over a 10-year period, according to Deutsche Bank AG.
Yields on government debt have fallen about 81 basis points since the third quarter of 2010 amid $1.74 trillion of debt issuance as central banks expanded their balance sheets, Dominic Konstam, global head of interest-rates research at Deutsche Bank in New York, wrote Aug. 10 in a research report.
“It seems to be taken for granted now that central bank policies have implicitly underwritten a period of financial repression by artificially suppressing returns,” Deutsche Bank said. “For the issuer this is the mirror image of the benefit in terms of lower borrowing costs.”
The U.S. has spent about $323.1 billion on interest expense on its $15.9 trillion of debt this fiscal year, which ends Sept. 30, compared with $412.5 billion during the same span in 2011, according to data compiled by Bloomberg.
The Federal Reserve bought $2.3 trillion of mortgage and Treasury debt from 2008 to 2011 in two rounds of so-called quantitative easing, or QE. The Fed also pushed down U.S. borrowing costs by holding interest-rates near zero since 2008 and by announcing its intention to keep them there through 2014 to stimulate the world’s biggest economy.
The European Central Bank has about 3.1 trillion euros ($3.82 trillion) of holdings, up from 1.4 trillion euros in August 2008. ECB President Mario Draghi said the Frankfurt-based central bank may buy government debt in conjunction with euro- area bailout funds. The ECB later said it may take such measures only if troubled nations commit to improving their economies and fiscal positions.
“If financial repression is achieved through inflation, the costs are much higher since they will reflect reduced real returns of all outstanding debt rather than reduced returns on debt instruments held to maturity,” Deutsche Bank said. “In this context financial repression through depressed yields is considerably more benign than through inflation.”
Overall U.S. consumer prices increased 1.7 percent in the 12 months ended in June, matching the year-over-year gain in May, a Labor Department report showed July 17 in Washington.
Yields on Treasuries maturing in 10 years touched the lowest ever at 1.38 percent on July 25. Treasuries have returned 2.1 percent this year as of Aug. 10, according to Bank of America Merrill Lynch index data. The securities gained 9.8 percent last year, their best return since gaining 14 percent in 2008, index data show.