Europe’s debt turmoil and a decelerating US economy are creating a world where investors are effectively paying governments to hold cash, Peter Fisher, head of fixed income portfolio management at BlackRock, told CNBC on Friday.
With markets increasingly fearful of a euro zone break-up, investors are flocking to the safety of shorter-dated government paper. That is driving interest rates lower in an environment where inflation is already low, meaning investors are getting safe-harbor but little to no returns.
“It’s telling us there’s a premium on cash,” said Fisher, a former official with the U.S. Treasury and Federal Reserve. “There's an extraordinary bid for everything under a year in Europe, leading us to negative nominal interest rates.”
The BlackRock portfolio manager added that the dynamic is unhealthy for banks. “If we want to create credit, banks having a destabilized deposit base [won’t] make them feel good about writing loans,” he said.
Fisher also said the instability should make the Fed “think harder” about their efforts to lower borrowing costs via “Operation Twist” and jumpstart the economy .
“They’ve got to think harder about the slope of the curve they want,” the portfolio manager said, adding that he disagreed with the Fed’s efforts to drive down long-term borrowing costs by driving up short-term interest rates. “I hope they don’t do more ‘Twist’, because that’s counterproductive.”