What's going on?

The European Central Bank (ECB) started directly buying the debt of European companies (a.k.a. corporate bonds) on Wednesday and, partly as a consequence, European bonds are now offering record-low returns.

What does this mean?

The prices of corporate bonds have moved steadily higher since the ECB announced in March that it would directly buy them (as part of a new array of supportive economic measures). That�s because investors already bought them with the knowledge that the ECB would be a big buyer. But remember, when bond prices go up, the returns available to investors go down (click here for an explanation). And so, with record high bond prices, investors who buy these bonds now are earning a record low return and companies are able to borrow at a very low cost.

Why should I care?

The bigger picture: The ECB is keeping pressure on interest rates to stay low globally. Due to the ECB�s actions, it�s now cheaper for European companies to borrow cash. If the US Federal Reserve (the Fed) did the opposite and raised its interest rate, that would make it more expensive for US companies to borrow money – which would hurt their profits. In a world as globalized and competitive as ours, Europe�s low interest rates make it difficult for the US Fed to raise their rates without making life more challenging for American companies (and the US economy) – which is one major reason why the Fed is struggling to raise its interest rate.

For you personally: Low interest rates can have bad side effects. The impact of low interest rates on savers (like you or your parents) can be problematic. If they earn very little interest on their savings, they might not be able to afford their lifestyle when they retire (for example). Also, pension funds struggle to generate the minimum return they need in order to satisfy their future obligations, like your retirement! So while these low-interest rate policies might help the economy grow, they have drawbacks.