Negative yields: What could go wrong?

Carlos Barria | Reuters

Some central banks have cut interest rates into negative territory in an effort to eke out some economic growth, but the step could spur unintended, counterproductive outcomes.

"Negative rates could backfire," Francesco Garzarelli, co-head of macro markets research at Goldman Sachs, said in a note Friday. "At least some segments of the population could feel poorer, and less secure," he said. "Rather than lifting consumption and borrowing, ultra-loose monetary policy could perversely lead to an increase in precautionary savings and a slower economic recovery."

Read More Why yields may take another leg down

In an effort to ward off potential deflation and bolster nearly flat-lined economic growth, some central banks -- including the European Central Bank (ECB), the Swiss National Bank and central banks in Sweden and Denmark -- have cut rates into negative territory.

Going negative

A big chunk of the government bond market has gone negative: JPMorgan estimated that in January, around $3.6 trillion worth of developed market government bonds—or 16 percent of its Global Bond Index—was at a negative yield.

That's something that can spur new problems, Goldman said, noting concerns that pension funds and insurance companies may struggle to meet guaranteed payouts.

"Today's very low or even negative fixed income yields often are not large enough to match future liabilities," Goldman said, noting insurance companies are generally assuming forward rates will be positive and above current rates. If low or negative yields persist, making guaranteed products work will become increasingly difficult, it said.

Read More Negative yield bonds: Here's who's buying

In addition, if banks' profitability takes a hit from negative rates, it could actually discourage bank lending, hurting efforts to revive economic activity, Goldman said.

There's also the risk of asset bubbles forming, Garzarelli said, adding the risk is especially high for "high duration" assets such as technology stocks and high-dividend-paying stocks, which already have "eye-watering" valuations.

Upending theory

Others also believe ZYNY, or zero-yield to negative-yield, may not follow the theoretical playbook in the real economy.

"Traditional economic theory suggests that low interest rates will encourage households to borrow more, both to acquire housing and also to favor present consumption over future consumption," Michala Marcussen, global head of economics at Societe Generale, said in a note dated Sunday. But in practice, it may not work as households are already relatively highly indebted, labor markets remain fragile and regulations have become more demanding, she said.

"Indeed, households may even opt to save more to compensate for low yields, and all the more so in ageing populations," Marcussen said.

Corporates also aren't really cooperating, using low yields to borrow to buy back shares or retire older debt, steps that don't help the real economy much, she said. Societe Generale also expects banks to use some of the proceeds of the ECB's new quantitative easing program to pay back euro-area debt and deleverage rather than increase the credit supply there.

"Yields could fall much lower and even deeper into negative territory," but that's no guarantee of an economic recovery, she said.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1