Market Insider

Negative yields are policy overdose

Rick Rieder
Katie Kramer | CNBC

Negative interest rates have become the equivalent of central bankers serving one ice cream sundae too many to the world economy, BlackRock's chief investment officer of global fixed income says.

"It's my ice cream sundae theory," Rick Rieder said in an interview with CNBC on Friday. "You keep doing it for a while, it's not too bad to have a second sundae … but the third one doesn't feel that good. …The market gets a near term rush, and then it revolts from too much policy, and I think they're seeing the half life shorten with each subsequent move."

By some estimates, there's nearly $7 trillion in negative-yielding debt in a dozen countries, including Switzerland, Germany, Sweden, Finland, Denmark and Belgium. The latest central bank to move to negative yields was the Bank of Japan. And Sweden spooked markets recently when it went even deeper into negative territory.

"When you breach zero, you're taking money from savers, you're taking money from the banking system … and I don't see who you're handing it to," he said in the interview, which was released Monday.

Rieder said shifting a near-term subsidy from savers to borrowers sometimes makes sense, as in the financial crisis. But it needs to be a short-term phenomena.

There is no evidence that negative yields are actually boosting growth, and one argument against them is that they are spurring a competitive weakening of currencies.

"This dynamic where you could cheapen your currency versus others in the world, then you create this retaliatory currency war we've seen play out," he said.

In such an environment, he said, savers may rush to put their wealth into hard assets like gold — or even hoard large bills in vaults.

Read MoreThe debate over the $100 bill

"I do believe it increases concerns of instability and confidence in the system when you move to negative rates, " Rieder said. One of the ideas behind negative rates is it forces investors to take greater risks' he added.

Negative yields may have already backfired on the Bank of Japan. The yen immediately moved lower on the BOJ announcement, but it has been moving higher ever since. "It was incredible how fast it moved the other way. Hopefully that signaled negative rates is not a panacea for stagnant economic growth," he said.

Quantitative easing policies are preferable since they have been shown to take pressure off financial institutions in times of instability, and they can dull volatility and boost confidence, he said. But Rieder also believes the world's central banks have to let the economy stand on its own, with a lot less monetary policy.

"We're reaching a point where it has to be fiscal policy. It has to be a real policy that gets economic growth," Rieder said.

While the Fed is unlikely to move toward negative yields, Rieder said the global move toward them has made it harder for the Fed to move forward with its rate-hiking plans.

The Fed in December raised the fed funds rate for the first time in nine years, and had projected four hikes for this year. The markets are doubting the Fed in the face of weaker economic data and because of the easy policy of the world's central banks. The market is pricing in the next rate hike for 2017.

One persistent worry has been that relatively higher yields in the U.S. could drive up the dollar and hurt the U.S. economy.

Fed Chair Janet Yellen recently discussed in congressional testimony how the Fed considered such a move.

"I think it's very far from today's discussion, but she was clear about how you couldn't rule it out," said Rieder.

"I don't think the Fed is anywhere close to really considering doing negative rates. But it will certainly slow down the Fed's ability to move the funds rate higher," he said.