Futures market says negative rates coming to US

Fixed income investors are generally pessimists. They see trouble even when the sun is shining. They are skeptics and paranoid. Never trust anything the government or central bank tells you, and if they deny too much, it is all the more likely to occur. 

The rate futures (Fed fund, SOFR) markets are now pricing the chance of negative rates for 2021. The prices just moved beyond 100 for highs. Eurodollar rate options are showing volume and pricing that give negative rates a real albeit low probability of occurring. Anyone who does not think this is a real probability is just fooling themselves. Markets have been surprisingly fast at discounting future Fed policy better than the Fed itself. 

We have seen the Fed balance sheet explode in days not months beyond anything seen during the initial GFC surge. We have seen new Fed programs that were just dreams during the last crisis. All Fed programs are on steroids. Fed Chairman Powell has stated he will do "whatever is necessary"; his variation on former ECB president Draghi's "whatever it takes".

The ECB has been running negative interest rates since June 2014. The BOJ has been doing the same since January 2016. The global bond markets are awash with negative rate bonds. Ken Rogoff, Harvard professor and former chief economist for the IMF, has made a strong case for negative interest rates. In his view, there is no downside. It is just an engineering problem that has to be managed. 

Whether a continued crisis with a slow rebound, market gridlock, or continued war financing, there are any number of scenarios where negative rates could become a reality. Why not for the US?