Updated with correction.
A weakening global economy could push yields on U.S. government bonds to zero or lower, creating especially challenging conditions for executives at U.S. retirement funds.
For a pension executive looking to move toward a fully derisked portfolio or simply achieve moderate long-term returns, "negative yields will be a monumental challenge," predicted Tim Barron, senior vice president and chief investment officer with New York-based investment consulting firm Segal Marco Advisors.
For now, the U.S. — with a federal funds rate of between 2% and 2.25% — remains the proverbial one-eyed man in the land of the blind, vis-a-vis countries such as Germany, Japan and Switzerland, whose bonds are weighed down by negative yields now.
But analysts say the once unthinkable notion that the U.S. could join the ranks of sovereigns exacting a fee from creditors for holding their bonds is no longer far-fetched.
"This business of negative yields arriving in the U.S. at some point … is not so fanciful," said Tapan Datta, London-based head of the global asset allocation team for Aon's retirement and investment business.
When the next recession comes, it's "certainly possible that U.S. rates will return to zero, and with limited ability to stimulate, bond yields could go much lower than they did at the time of the global financial crisis," said Mr. Datta, in an email, adding "in extremis, in a Japanification scenario, U.S. yields could indeed go negative."
Some market veterans, while convinced negative U.S. yields are unlikely, note that the bar for ruling out such developments has shifted dramatically in recent years.
If someone had asked 10 years ago, "do you think that 10-year (German) bund yields would be at minus 50 or 60 basis points, I would have said 'of course not, that's ridiculous,'" said Jim Caron, New York-based head of global macro strategies with Morgan Stanley Investment Management's global fixed-income team.
But even if the odds are 15% or less, "we really need to be prepared for whatever outcome might be there," he said.