Fed’s Conundrum: Can Lower Rates Combat Investment Chill; Germany’s Longest Bond Goes Negative for First Time

• One question now is how much a decline in borrowing costs, spurred earlier this year by the Fed’s decision to shelve rate increases and now by their move to cut rates, will help businesses and cushion a broader slowdown driven by some factors outside the Fed’s control.
• The central bank’s policy may be an imperfect instrument if investment is being held back chiefly by doubts about tariffs.
• A decline in borrowing costs could help some highly indebted firms, particularly in the capital-intensive manufacturing and rate-sensitive construction sectors, by letting them shore up balance sheets
• In calibrating short-term interest rates, Fed officials face similar challenges as business executives because they are deciding between two outlooks: one in which trade tensions are resolved soon, and one in which they aren’t.

• Rates on 29-year bunds dip to minus 0.004% as investors seek haven assets, suggesting investors have to pay to lend to the Germany government.
• In reality, Berlin runs a budget surplus and has showed little indication it would increase spending, as other slower-growing European countries would like it to do.
• Another factor weighing on bond yields is a scarcity of supply. Germany’s federal government has about €125 billion ($138 billion) of outstanding tradeable debt with maturities of more than 20 years.
• With bund yields becoming progressively unattractive by the hour, investors are scrambling to buy whatever is left with a positive yield, which on the German curve means extending duration.