Recently, U.K. gilts briefly joined the growing number of sovereign bonds that trade at negative yields. Investors should take note. Capital flows from regions of the world with slow growth and negative rates will continue to exert downward pressure on the term structure of the U.S. interest rates. As I have said before, it would be imprudent for investors to rule out the possibility of negative rates in the United States.
The natural rate of interest is the real federal funds target rate that would be neither expansionary nor contractionary if the economy were operating near its potential. A model estimate of the natural rate—developed by Thomas Laubach and John Williams, currently President of the San Francisco Fed—has fallen sharply since the crisis and stands only slightly above zero. A lower natural rate implies less need for policy to tighten and a greater likelihood that policy measures now considered unconventional will be employed in future cycles.