What I didn't get from the article is a "so what". Why does this matter? Or maybe they did explain why it matters, and I just don't have enough knowledge to understand.
Here's the missing question: Imagine you are a Eurozone pension fund or life insurer. You have to invest billions of euros very safely and eek out a return that is no less than inflation. How do you do that?
Inflation (HICP) was 1.73% in 2018. German Bunds, the safest euro denominated investment with sufficient volume, yield close to 0%. Now you look across the Atlantic and find that 10 year treasuries yield 2.63%.
The problem is that simply investing in treasuries wouldn't work because currency fluctuations would likely dominate any interest income. So you would need to hedge the currency.
The Bloomberg article is about why hedging the EUR/USD currency pair is currently too expensive for this idea to work.
It matters for European savers, including everyone who is paying into a defined contributions pension (e.g most workplace pensions). A significant chunk of those savings currently yields negative returns. The alternative is to take a lot more risk than you want to or are allowed to take.
I don't think anyone assumes the opposite, that the EUR will rise as a result of strong economics performance.
I don't find it exactly reassuring if everyone is already thinking the same thing.
Of course the picture gets a little murkier once you start considering inflation caused by exchange rate fluctuations. But that is probably not the main concern in a large currency area with an independent central bank.
What DC scheme wouldn't let you put say 100% in shares?
Or if not you could take the currency risk on yourself, and buy US shares.
Want to take? That's an interesting question. I would contend that if bonds are yielding 0.08%, they're probably overpriced and thus too risky to buy.
I say that as some one 100% in equity with a long time to retirement, so to each their own.
I'm looking at it from the point of view of fund managers. If the fund promises to invest 50% in bonds then someone's job will be to find suitable bonds.
If you're young and you are free to choose how you want to save for your pension then I agree that stocks are probably safer. Perhaps even if the whole world slowly turns into Japan.
Because the ECB had negative rates for a while, i.e. some parties had to pay to hold cash.
And lastly, because economic developments which don't affect cash, may affect bonds. i.e. if the interest rates drop, existing bonds will become more valuable. I don't expect this to happen, but the point is that you don't just buy bonds for their return today, but also in expectation for their relative return compared to the rest of the bond market in the future, i.e. their future value. That doesn't apply to cash in the same way.
Where do you hold the cash? Physically? As deposits in a bank? “Cash” is short hand. This article debates different forms of cash. (OTR sovereign bonds are usually considered cash.)
The alternative of holding it in actual cash, comes with security costs, storage costs,... The negative interest rate is still cheaper then the 1% annual cost of securing banknotes. It also puts an implicit floor on how low the central bank can lower the interest.
Counterparty risk dominates, for most treasurers. You don’t want your billions of corporate deposits in the bank that went bust. Treasuries—or their local equivalent—are a safe way to hold cash.
Instead of the usual layperson interpretation where cash is "a bunch of currency, either physically in my hand or in a bank account", the meaning here is "stuff with incredibly low risk" i.e. you can be very sure that you'll not lose money over time.
Sovereign debt, including bonds, is regarded as the safest type of debt and therefore falls into the 'risk-free' bucket in the finance world. Since cash is usually regarded as risk-free, the word "cash" has come to be a short-hand for "(almost entirely) risk-free assets".
For one, sovereign bonds are very obviously not risk free. Governments have a long history of going bankrupt or giving bond holders haircuts. They're treated as such because regulations passed by governments force them to be treated as such, which is clearly self-serving. The finance world is mixing up "we must pretend it's risk free" with "actually risk free".
Again, the fact that it's not considered that way says more about the finance industry than it does about ordinary terms like cash.
I'm not a fixed-income (read: bonds and other interest-rate derived financial instruments) person, but I think the erosion of 'value' via inflation is missing the point.
Sovereign debt is the least risky form of debt there is, period. Everything else that's denominated in the same currency has more risk, not least due to the fact that the pricing of every financial instrument takes the risk of the sovereign debt into account aka the risk-free-rate.
Yes, the absolute amount of risk of a sovereign debt is different depending on who controls a particular fiat currency - but in relative terms, any financial model will start with that baseline. Obviously, cash in that same currency bears some risk due to inflation, which is why people talk about 'real interest rates' that take that into account.
If you lend someone money, you take risk, and you get interest as compensation. That risk includes your predictions of inflation, and the interest rate you are prepared to accept should include that too. If you don't like it, don't lend the money.
Arguing about a 'transfer of value' implies that you have another way of representing value that is better than the currency itself. I can't think of one, but I'm open to suggestions.
A truly risk free currency would be a currency that couldn't be inflated by a government to escape from its debts, like a cryptocurrency (if they actually worked).
And state pension schemes are not usually investment based at all. They are usually funded by current social security contributions and taxes. If they go bankrupt it's for political reasons.
More likely than bankruptcy is that many people will receive lower pensions than they had hoped for.
Even so, I think it’s a little disingenuous to compare EUR denominated T-notes with Bundes (which are natively EUR denominated). Of course if they just compared regular T-notes, with Bundes, they really wouldn’t be a story since T-notes are paying a great rate compared to any other government bonds.