Germany for First Time Sells 30-Year Bonds Offering Negative Yields
wsj.com
wsj.com
- Many financial institutions are required to hold a certain percent of portfolio in safe assets. German bunds are among the safest in the world.
- A holder of a bond earns a capital gain (bond goes up in price) when interest rates fall. In that sense, zero is no limit at all because there can always be a buyer willing to accept an even lower (more negative) yield.
- Bond investors are well-aware of the two points above. When they sense that interest rates and/or inflation are headed lower, they know they can profit by buying, regardless of yield.
- Anticipated rate of inflation matters a lot because investors seeking return through yield focus on real interest rates (nominal rate - inflation). Inflation can be negative as well (deflation). If inflation is lower (more negative) than the bond's nominal return, that's a real positive yield. And that positive yield is locked in for the term of the bond, which in the case of the story is 30 years.
- The European Central Bank has repeatedly signaled its belief that zero is no barrier and that negative yields will be tolerated indefinitely. The ECB stands ready for quantitative easing (QE), in which the central bank buys bonds with money it creates from thin air. Investors know this and this compounds the incentive to pile on and buy bonds to enjoy the capital gains (and real returns if the investor believes that deflation is inevitable).
It's likely that all these factors combine to create the current environment. How long all of this can continue is anybody's guess because the situation is without precedent.
It's as if the financial crisis of 2008 was never resolved - just papered over through massive central bank purchases of treasuries and stocks (Japan's central bank owns a major fraction of the value of the Japanese stock market at this point).
But curiously 10y german bund yields have recently hit -0.70%, and a couple other EU countries (France, Netherlands, Belgium) have also dipped below -0.40%.
So it must be more than the negative deposit rate. It's also the QE program which buys bonds (though it's on hold since the start of the year), and the expectation of lower deposit rates, and the expectation of more QE.
That's because the QE program only stopped increasing the ECB's assets. When bonds that are held by the ECB mature, the equivalent amount in new bonds is still being re-bought.
I don't think negative deposit rates are really needed to have negative bond yields. You only need a bond buyer (e.g. the QE program) who drives up bond prices beyond the face value + all coupons. Negative interest rates were just a natural step in the progression of lower rates, zero rates, negative rates, and QE. The next thing will be some form of helicopter money.
Reinvesting maturing proceeds does not produce the same effect as net purchases. One, maturities are lumpy vs regularly scheduled net purchases. There have been rate shocks where idiosyncratic country events happened outside of maturities. Two, while the ECB can basically do whatever it wants, no new net purchases restricts its ability to act in an emergency. Three, size is much smaller.
>I don't think negative deposit rates are really needed to have negative bond yields. You only need a bond buyer (e.g. the QE program) who drives up bond prices beyond the face value + all coupons. Negative interest rates were just a natural step in the progression of lower rates, zero rates, negative rates, and QE. The next thing will be some form of helicopter money.
Note how I didn't mention anything about negative rates in particular; just low rates and that the deposit rate anchors things. Whether rates are negative or not really doesn't matter in isolation. What matters is the spread vs other less risky assets for the goals of the central bank. If a central bank indiscriminately purchases bonds without regard for existing yields or the deposit rate, they will quickly lose control over the market.
Can you explain how this can possibly beat cash? If I say to you "I'll let you pay me ten cents to hold onto your $100 bill for a while, and give you a paper showing the obligation to repay your $100" (the meaning of a negative yield bond), how can the offer to let you pay ten cents to let me hold your $100 possibly be less risky than just holding the $100?
Why would a bond with a negative yield ever be a safer asset than just holding the cash?
Like banks might say there is no way we want your $10 billion in cash to look after. Either invest it yourself or pay us to invest it for you.
Now, you could put cash into a USD account at a US bank, where interest is still currently positive, but if you were storing Euros, you now have currency risk and jurisdiction risk. Negative rate German bonds have less risk than that.
These costs add up. Once you've done all of those things, you're essentially a bank.
Salaries of 30k €/year. 8760 hours/year, one FTE works 2080 hours/year, so that's 4.x times 3x redundant guards, or about 500k €/year with overhead.
That's half a percent negative return.
Presumably, the physical storage cost creates a lower bound on how negative the inflation rates can go, but I'm sure I left off a bunch of other things that would add to the bottom line costs of this proposal, such as insurance.
If interest rates were positive, you would want to make loans, but then nobody would want to put physical euros into your vault in the first place.
And conversely, if they didn't want to provide the bed for you to keep your money under because it would defeat their interest rate policies, they should (and might) make putting money under beds illegal.
It just doesn't make sense for the sizes of socks and beds and cash denominations, and the security of locks, and the wages of security guards to determine macroeconomic policy.
If the amount of physical cash is huge however, say 1 billion euros, it can be less liquid than German government bonds. There is cost of moving, counting, securing it and significant delay for buying and selling. If you try to buy something for 1 billion EUR in cash, it might cost 100k EUR to do so and few days until you can buy anything.
But you are correct, there is probably a limit after wich banks start to convert some part of their assets to cash.
Edit: I suppose since it was an exchange outside of Europe, they probably wanna put them in circulation before they lose legal tender status.
Of course if interest rates go up, you have to keep the bond until it matures (earning less interest than you would with a new bond), or sell it for a capital loss. But this is always a risk with long-term bonds, and institutions still hold them.
I’m still trying to understand how this all happened.
> the central bank buys bonds with money it creates from thin air
QE generates inflation in the long run, which would by definition make these bonds less valuable over time.
In practice this is turning into unnatural demand guaranteed by the law, which goes against free markets and will eventually implode upon itself. If you force the market to buy a certain product regardless of quality, then the underlying quality of that product will erode (as there is no longer an incentive to provide quality and quality implies cost), and the market will evaporate as stakeholders disappear and move to other markets which do assure real quality. That there was natural demand for such products in the past, and indeed that natural demand may coincide with unnatural demand in the present, is not a guarantor for demand levels staying natural in the future.
In context, this creates underlying pressure for investors to divest from Euro holdings. It's likely that investors are currently sticking with the Euro because they have few other avenues for escape, but this is not likely to hold - whether due to Brexit/Euroskepticism or some other external crisis which changes the playing field.
The central bank does not "control" rates, they respond to the market signaling where rates should be.
But for this and the other reasons you mention, wouldn't cash be in any case better than the bonds?
Imagine you have a million dollars worth of cars. If you want to store that in a bank, you'd pay them money to do so. Why? Because the car has no value to the bank. The only thing they can do is store it in the vault, which requires security personnel, space, climate control, etc.
Now instead you have a million dollars in cash. In the current environment, where more people want to put money into the bank than take it out, the cash also has no value to the bank. They can't loan it out again because no one wants to borrow that much. So they charge you for storing your money. This is how they make a profit. By slowly taking your balance, since they can't make money loaning it out.
A negative interest rate basically means more people want to save money than spend money. When the government offers negative rates, it's because they want people to spend money instead of save it. When a bank does it, it's because more people are putting money in than taking it out.
Paradoxically (well seemingly so) the best time for them to buy or merge with other small community banks was if there was an area they wanted to be in ... that was doing well economically. That was the time to look around at the local banks that they might want to pickup, or those banks actually came to them.
Local small (usually rural / suburban) community banks would find themselves in a bad spot as the locals were doing well financially, paying off loans early, not really borrowing much, and the locals with their extra money started stuffing it into the local bank. Businesses expanded, but they were able to do so with short term or very limited loans.
The local small bank found itself flush with cash, and nobody who wanted it (well not nobody but you get it). That was the time for the other bank to swoop in and save them as they could provide a larger regional reach (and some side businesses that benefited from being backed by all that cash) to areas that still wanted that money for loans.
But how can I reconcile what you’ve said with articles like this?:
https://www.cnbc.com/2018/03/15/bankrate-65-percent-of-ameri...
1) That's America. Europeans actually save money.
2) This isn't about retail investors (normal people). These bonds are for governments, large corporations, huge business deals, etc.
If you have less than 1 million dollars you should be saving money. If you have more than 10 million dollars you have too much money.
Which is why this is a signal that the economy is failing. The underlying behavior which drives the value of currencies is that the currency is being used. If people just stockpile cash then the value of that cash is eroding as people find fewer uses for it.
Since the productive use for debt is as an engine for growth, if there isn't anybody looking to secure debt for growth then we're seeing the long-term effects of a loss of dynamism in the economy, which is detrimental pressure on the underlying economy itself. It's not sufficient to try to persuade people to spend more on consumption (people are always incentivized to consume) - people need to be incentivized to take risks for growth, which they currently are not.
What the central banks will realize is that you can't incentivize people to take risks by holding a financial gun to their heads - that only incentivizes people to seek further safety. You need to, perhaps paradoxically, make it safer to take risks. If the ordinary control for doing so (reducing interest rates) isn't working, then there's a compounding factor which is preventing that safety from being felt.
Negative yields means that I put in $X (or euro/whatever germany is using) and I later am guarenteed no more than $Y out of the exchange, where Y < X. I am literally guaranteed to lose money. I could just hold on to my money, "keep it under my mattress" and still make a better ROI than bonds with negative yields. Why would anybody buy these bonds?
Most 'central banks' dont really offer banking services. Eg: you can't deposit to the federal reserve.
So the question is what to do with your money, that is both (a) easily transferable (b) auditable (c) safe
Government bonds are the traditional answers to these. They offer all of a,b,c. And until now they even offered extra money, aka interest, as bonus.
I think the best way to understand bonds is the old fashioned paper bonds. There was 2 parts: a primary part representing the money down, and a detachable 'coupon', say 5 of them for yearly interest for five years. So every year you'd bring the appropriate coupon in and get your interest. At the end, you'd get your money back which is represented by the main bond. Or more likely trade it for another bond.
All this means is the coupons now represent how much you have to PAY the government for issuing the bond. So it's more like a maintenance fee, rather than 'interest'. Or another analogy, safe deposit box fee. Bank account fees. Etc.
Money in the mattress, in physical vaults, safe deposit boxes all have the following property: (a) difficult to value (gotta count all those bills! who's doing the counting? is it auditable? did any 'shrink' somehow?) (b) costs quite a bit of money to just store ($100m is a lot of bills! it weighs a lot! it can get set on fire!) (c) not so easy to transfer.
As a result of all of the above, it's unlikely to be usable as collateral. Since the primary target is banks, they need 'liquid' assets that they can present to their auditors to prove they have reserves for their deposits.
https://www.ecb.europa.eu/stats/policy_and_exchange_rates/ke...
[0] https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2283~2ccc0749...
In addition, these bonds could in fact make you a lot of money in the short term if the interest rate for these bonds continue to get more negative.
What interest rate are you talking about? The interest rate for all the other maturities was already negative.
But for retail investors who can store their money in a FDIC insured savings account it’s not clear why they would buy negative yield bonds.
Bonds are easily and instantly transferable privately without causing major market loss.
This is the thing about huge finance like this, there's a gravity to money, and your intuitions from having bank accounts, money, etc, doesn't apply because entirely new problem appear you will never have. What if every time you paid a major bill at your credit union you threatened the solvency of that institution?
If you want to hedge against inflation you would need to invest in something that either yields a positive return or something whose value isn't tied directly into a money amount, like land.
Once it is in a bank now you have to play the game of trying to figure out the comparative risk between the bank not being around any more 30 years from now, versus the chance that the German government will have forgotten how to operate the money printing presses.
Of course, since this is the EU, I'd actually be rather worried about the latter. Unlike sovereign currency countries, EU countries do not just get to print Euros. A lot can happen in 30 years, especially to a country with 1.5 births per woman like Germany.
Of course, that could never ever ever happen in Germany? Not even in 30 years? Let's hear an explanation.
well anything can happen. I mean I live in germany and I can totally see that happen. our biggest industry needs a lot of breaking changes or else they will fail pretty hard. and they have less than 30 years to do so
Trust in the euro (not necessarily the EU as a whole, as it is a target for much local political hate & lies when it's easier to blame Brussels than accept responsibility for mistakes) is at an all-time high, with not even Italians wanting to give it up. No one wants the lira or drachma back.
One risk (of many different kinds of financial risk) with buying debt denominated in Euros from EU governments is that if such a nation is economically worse off than the others nations that also have Euro issuing rights at the time of bond maturity, then the chance of default goes up substantially. As happened quite recently with Greece.
This is not a type of risk faced with nations with their own sovereign currencies. Default is still possible, but devaluation is a safety valve.
Forecasting 8% vs actual 2% is much more terrifying that forecasting 1% vs actual -1%.
Negative yield on an investment means the banks and investors believe the amount of money will shrink in 30 years due to less demand in the future or too much supply right now. They further believe that the yield while negative is still better than the amount of money shrinkage down the line. Thus a negative yield investment is still a sound investment.
The collateral needs to take the form of low-risk, liquid securities. Usually government bonds. Bringing a big bag full of cash to a derivatives exchange is not accepted. If you're a big financial institution, you have no choice but to buy government bonds. Even if they're negative yielding.
Since 2008, there's been a massive increase in financial regulations. Policy-makers have desperately pushed to make banks and other financial institutions less risky. That mostly means much higher capital requirements and more central clearing. In turn that means the demand for holding high-quality government has exploded.
Furthermore, how could any bond (or anything at all for that matter) be less risky than cash? the market value of a bond may change over time but $1 will always be worth $1. Inflation may change the purchasing power of that dollar but then the exact same mechanism will effect the bonds as well.
* risk of physical destruction
* risk of physical theft
* risk of forgery
etc etc
There's some nonzero cost to accept, handle, vet, store, etc for cash. That's not even including if there are extra reporting laws or other for large amounts of cash, which just adds to the overhead.
Have $xx,xxx in a checking account at a national bank. It’s a database entry, not a pallet of pennies. Furthermore, with fractional reserve banking, I sincerely doubt if there’s enough coins and bills in the country to account for the total “cash” in all the accounts, let alone all the assets.
Similarly, everyone involved in these transactions have access to the same banking system. There’s no reason you need to fly a C-5 with pallets of Swiss francs around. (Even then, it seemed absurd since both governments could access Swiss banks.)
At the scales of financial infrastructure, bank deposits are not cash. They are debt issued by banks. The point of collateral is to give a bank’s word weight.
Cash is more of a general category of things that are suitable to use for similar purposes, than one specific thing.
28 since 2010.
In germany unless you're with DBAG it's not clear the government would step in and save you.
e.g. The Farmers and Merchants State Bank of Argonia with about $34M in assets.
The FDIC has stepped in as expected with all of these, I believe.
It’s disingenuous to claim that all banks are equal in terms of capabilities, assets, or risk.
Or say in the US, you'd buy that from US Bank, which isn't in the big 4 consumer, or top few commercial, and it could be let to fail.
It's still safer than a tiny bank, but it's not as safe as government bonds.
That's all it really boils down to - you pay a bit extra to get more safety.
You may be comfortable depositing $10MM in a US Bank reg D account, but I would not be.
Well actually for US Bank specifically I might because I know their business model is incredibly conservative. But replace that with another large but not big4 bank.
The true decision point isn't 0%. It's the rate for the risk/cost of holding cash.
BTW has there been any research toward what this rate actually is?
A) keep the euro notes in their vault, which only works if you deposit paper bills in the first place
B) keep electronic deposits in the ECB and pay interests to do so
In either case if they give back the money to the clients when they ask for it how do you expect them to cover their operating costs (plus the interest they are charged by the central bank in case b)?
I'm sure if government bonds were negative for a long enough time an alternative product would appear.
If it just goes into the cash account you're describing, it does nothing but exist, in the event of recessions this would be severely dangerous to a countries financial system because it would be the safest place to store your money, safer even than bonds, so at the exact time when the economy needs cheap credit, interest rates would rise as money drains into these electronic cash accounts.
Physical cash is also debt (backed by the full faith and credit of the US government, in the case of the US, or the relevant issuer in the case of other fiat currencies).
Except it is being invested. That's a major part of the role that the government plays when interacting with the macroeconomy.
So people should be forced to invest their money beyond the extent to which holding that money inherently counts as an investment, even if they don't think any of the ventures that they directly invest in are worthwhile?
The fact that government "is debt backed by full faith and credit etc etc etc" does not answer the substance of the question I was actually asking, and which should have been clear from the context I was asking.
But your first question is much more interesting in what it seems to imply.
If i understand it correctly, the converse would be: entities are free to not invest their money when there are no worthwhile ventures.
This sounds all well and good on an individual level. But by what logic or mechanism can the ~200 countries that exist have the ability to 'hold' money and not 'invest' it?
Money is debt. You hold something now and expect somebody else to give you something of value for it in the future. But the future is always uncertain. You may lose out on the deal by holding on to your money. But you seem to be demanding that somebody somehow should guarantee that people never do lose by holding on, no matter what. Who would that somebody be? How could that even work?
It's not so clear cut anymore. Most currencies aren't backed by anything anymore nor are they tied to any yearly returns. They've become arbitrary numbers manipulated by central banks to control the economy.
Moreover, the relative constancy of the gold supply is a problem, because as the economy grows that makes each unit of gold more valuable … which leads to deflation, which is far worse than inflation, and can lead to utter economic desolation.
I hate fiat money, I really do: I hate that governments can inflate their way out of debts and inflate away my savings. But gold — appealing as it is — is even worse.
Ultimately I agree that fiat currency is a necessary evil because of the ability to expand with the economy.
So let's say I'm a bank with a stack of 1B in high denomination central bank notes. I calculate the rate of return as zero minus the annual cost of securing those and the annual risk that they are stolen or destroyed. Inflation isn't a factor because the bond is in the same currency. Based on your explanation that rate of return will be lower than the -0.11% that I would get from a german 30 year bond today. And there's simply nothing I can exchange those central bank notes for that would do any better than the bond.
Like OP I've never understood negative yield debt and I'm trying really hard to.
There's also the fact that bonds can appreciate, so even if on the face of it you're taking an 11bp hit that might not be true in practice.
There is no way to hold money that isn't ultimately lent to or borrowed from some other entity. You can store cash under your mattress, but even that's money that you've effectively lent to the government (the seigniorage of storing it under your mattress means that you've now given them the ability to print that same amount of money at zero extra cost).
This is harder to wrap your head around, but once you understand the principle - money is always at work, no matter what form it's in - it's a lot easier to understand the flow of money on a macro or international scale.
Yes, it can. It can't exist with the game playing that exists with most modern fiat currencies to create the illusion that they are something other than fiat of the issuing government, which creates a lot of artificial debt to create the illusion of a government constrained by the same fiscal concerns that apply to a country using commodity or foreign fiat currency rather than its own fiat.
But this is a behavioral hack to reduce the likelihood of a particular undesirable course of monetary policy (unrestrained money printing), not fundamental to the nature of fiat currency.
And the answer appears to be, because the Fed won't let them, because they are afraid it could undermine the regular banks.
Some hardcore asset management schemes store physical US bills in a high security storage. You will pay % negative yield on yearly storage cost, but cash is truly yours and you can withdraw any day.
Also in the EU, with some fintech startups, you can now open a bank account which comes with a IBAN number from a central bank of Lithuania - essentially your money is stored within European Central Bank system. You will have negative ECB interest and pay some extra, but there is no counterparty risk unless the whole European banking system collapses.
But of course, this does not insure you against systemic risks. When the financial system in Iceland broke down, depositor insurance meant nothing.
Another popular way of storing large amounts of money over long time, is to invest in real estate. Buy apartments in central Paris, London, New York. Very small risk that you lose anything, especially in real terms, if you can keep a cool head about when to sell. Downside is that these are not liquid assets.
Stealing bonds would have to be an information crime; surreptitiously rewriting the identity of the investor on all copies of the contract in existence. Or something like that.
What those comments don't explain is why anyone would buy this particular sovereign debt.
So: why would anyone buy negative-interest-rate German bonds when U.S. Treasury bonds still have positive interest rates, and are available in much higher volumes?
The investors buying these bonds are simply betting that these bonds will increase in value (which will supposedly happen if central banks cut interest rates more in the future).
These bonds don't pay out for 30 years and I bet few if any of the institutions buy them intend to hold them that long, they plan to sell when the value of the bonds rise.
So why not just park that money in cash? Well let's say you have $1M and you think bond yields will continue to fall. If bond yields fall further, then the value of these bonds increase, then you can sell them and realize a return.
However, you also want to think about any way that your cash holdings could increase. Could a dollar (or euro, or whatever currency) tomorrow be worth more than a dollar today? Yes, if there's deflation then it could make sense to just hoard cash under your mattress and realize that it's purchasing power is growing!
But these investors are assuming deflation is not too much of a risk - they believe central banks will act to quickly slash interest rates - both increasing the value of these bonds and decreasing the risk of deflation.
Markets are pricing in future interest rate cuts, which is probably not a bad bet to make. Markets a probably predicting interest rate cuts because they think various economies are weakening and central banks will cut rates.
And like many bubbles, it's entirely possible they'll be right in the short term, but it's basically guaranteed that they'll be wrong in the long term. You know exactly what a bond will be worth in 30 years, and with negative interest rates, you know it'll be worth less than now.
When people were selling houses in Detroit at the bottom of the housing crisis for $1000, the people buying them were expecting the value to rise in the future.
It's almost like profiting off of fear not greed.
People buying houses in Detroit have an investment thesis that there will still be people living in Detroit and they will still need houses, and even more broadly, that there will be more people needing more houses than there were at the bottom of the housing crisis. They may be right or wrong, but there's still a thesis based on fundamentals.
People buying unbuilt houses in the middle of the Everglades [1] because they heard of prices doubling or tripling within a year is speculation, and many of those areas still have not regained the value that investors paid for them, almost 100 years later, and probably never will.
If the price of something is higher than the "fundamentals support", that price will adjust because there are literally billions being traded every hour.
You could say that the price of land in the Everglades is set because of unsophisticated investors, with relatively little money at stake. They can't be compared.
long bonds aren't affected by overnight rates. that's why the yield curve inverts
In some sense, bonds “do not burn” whereas your house may, or tour bank account may collapse, etc.
The premium is the guarantee.
There isn't anything to understand. It's banking lunacy.
You only put money into negative yields if you are forced to do it.
This is the least important thing here.
Bonds have two ways of providing a return. The yield, and the price of the bond itself.
Lower yield means greater price of the bond. They are always inversely correlated.
Even lower yield means even greater price of the bond.
Because of worldwide policies, Its a bond bull market. The greatest bond bull market of all time and there is no exit.
Government creates new bonds at market price. Their independent Central Bank buys those bonds at market price giving newly created money to the government or traders. Market price is always a premium to the prior price. This action devalues the currency, otherwise known as causes inflation, otherwise known as people’s share in the currency stock is diluted.
So nobody needs to care about the yield. Nobody is thinking “well golly I’m going to use a few fractions of a dollar for the next 30 years” theyre thinking bonds to the fckin moon
Buy high sell higher directly to the central bank.
Benign attempts at economic stimulus have turned into a full blown currency war between monetary unions and nation states. The whole point is to get people to think “hm maybe my money isnt doing so well in a bank or in my mattress, maybe I should circulate it in risky investments” , and since people are so willing to pay for the privilege not to do that, the yields will go deeper negative. This prompts other monetary unions to cry foul and consider these actions unfair and uncompetitive, and so they do the same thing to devalue their currency to compete.
Any time you hear someone talk about responding to currency manipulators or reacting to the trade war by lowering rates or devaluing their own currency, just remember:
Bond. Bull. Market.
“Why are people buying at negative yields? It is mainly in expectation that you’re going to be able to sell to someone at a higher price later on,” said Andrea Iannelli, investment director, fixed income at Fidelity International. “Whatever the yield you have to assume you’re going to make more on the capital gain than lose on the yield.”
So Y < X, but if you bet you can sell at price Z to another buyer later, Z > X and you profit.
As an analogy I just thought up: it's kind of like overpaying for a house, thinking that in time the house value will appreciate.
[1] https://imgur.com/a/r9nCsN5
[2] https://www.portfoliovisualizer.com/asset-correlations?s=y&s...
I may be totally wrong, but I think the floor on negative yields is going to be the security costs of keeping cash for that timeframe.
For an individual, you would be unlikely to purchase these because the cost/risk of holding cash in a bank account is minimal and some type of insurance likely covers it, and most individuals want higher returns and would rather invest in index or mutual funds than CDs even if they had positive returns. And if you think that interest rates will drop in the future and you can sell the bond for more, you are still more likely to buy higher yield bonds with higher risk.
30yr Bunds were yielding 0.875% at the beginning of the year and have recently gone negative. If you were benchmarked against them and at the beginning of the year decided to either move to cash or short them, you more than likely lost your job.
Your question is actually fairly straightforward: people own these bonds because they have to. Most countries have regulations that force institutions to own these securities.
The more important question is actually: if you are a bank, what do you do now? You have to pay to lend money to people, it costs you 1%/year to just keep the lights on.
In Japan, most banks are (again) effectively insolvent. Germany is moving that way...and yes, the "point" of this action (according to central bankers) was to support banks...but it will likely end in most banks in affected countries going out of business.
...but don't worry, the central bankers will produce a brand new plan compose of intricate theories that clearly show how intelligent they are and how this totally wasn't their fault.
Safe assets sell a service: they’re a safe place to put your money. For this service, you pay a fee. There are other places to put your money, from cash to money market accounts to listed equities, but they aren’t safe. (They compensate for this unsafeness by promising you a return.)
You would buy one of these negative bonds as a safer alternative to the risks above.
This product may not be for you, but someone would be willing to make this trade.
Here's how you look at it. You give me $20K today, and I promise to give you $19K back in 30 years. The question is two-fold.
(1) What else would you do with that money, that would offer you a better return, factoring all externalities. Holding cash isn't free once you account for risks like getting robbed holding bills your house burns down, you get fake bills, and potentially-negative interest rates at a bank. If you see the market going down you're not going to put it there either.
(2) How much will $20K today dollars buy you as compared to $19K future dollars? If you're betting on deflation, then that $19K future dollars may buy you a house where $20K today dollars may buy you a car.
You think you would do that for millions and billions?
All other developed countries are selling negative or near zero government bonds. This has lead to huge international demand for US 30 year treasuries.
https://tradingeconomics.com/bonds
US treasuries are giving a greater yield than Italy or Spain for reference. Of course there will be huge demand.
Central banks are no longer islands. They are part of the global economy and a part of a market just like any other. The US acting alone to raise interest rates won't work like it did in previous cycles.
0.5% + US_30year_treasury_bond_rate + risk_adjustment
A negative interest rate is fine for US investors if you think the exchange rate will shift enough in your favour to cover your costs.
Not all German infrastructure spending turns out well.
For example, there is a budget reserved for infrastructure. The poor regions often fail to produce good enough project plans in time. The richer regions have more planners and present additional projects at the end of the year to get the left over money.
Is it due to portfolio theory where the assumption is stocks and bonds yields have inverse correlation and the way to manage risk is to have a correct ratio? Due to global QE there is too much money floating without enough to invest.
What’s the alternative to equities and/or bonds
What causes inflation?
Inflation is too much money chasing too few goods and services.
When populations are growing, you need to expand the money supply to avoid deflation. What happens when populations stop growing?
In developed economies money is being removed nearly as fast as it's being added, in the form of going into the blackhole of low to negative yielding paper. It's removing a present ~$17 trillion of capital that could otherwise be sloshing around pressing inflation higher. That's an extraordinary amount of money that has largely been rendered non-impacting. There are only a few areas where you see any inflationary pressure in the US, such as in assets like equities and real-estate, due to the Fed rates. In that case you've got people with immense collective free capital pressing aggressively upward on prices (willing to pay a high premium to try to get a return beyond what eg treasuries are offering).
It's why Japan can never spark traditional inflation (nor achieve any growth). Their epic pile of low yield debt has sucked a lot of the loose capital out of their economy. It's a giant pile of non-productive, non-active, ineffectual capital. Instead of going toward wage pressure / competition, growth, business formation & loans, VC, productivity investments, R&D, et al.
If you could unleash $20-$30 trillion of increasingly low yielding debt back into the US economy, inflation would skyrocket and it would demand far higher rates to control inflationary pressure.
It takes several things working in tandem to result in this unusual outcome. Countries outside of the developed world - the first tier, affluent economies - have a near impossible time achieving such low or negative yields, and lack of inflationary pressure.
What does this say about the state of the economy or the expectations/psychology of whomever buys them?
There's either something very hard to understand that's happening to the world economy, or it's just a strange phenomenon that people pretend to understand but don't.
The money can come back out, however it seems very difficult to see when that'll happen. That being said, if it does happen, I think we'll see a lot of inflation due to the sheer amount of money that would be pouring into the system.
I think actual helicopter money distributed equally to each EU citizen (a few hundred EUR) would have been much better than buying state bonds. Most people would have spent the money immediately and thus caused the desired inflation. As it is now the states benefit from QE in the first step, used in questionable projects in the second step and then it doesn’t tickle down but just inflates various financial asset bubbles. It’s neither fair nor effective.
Of course you need some thought, how to actually distribute the money without losing to much on bureaucracy, but it is possible.
And this effect isn't driving the price (imo). What is driving this is risk aversion, central banks, and regulatory requirements to hold risk-free securities (most investors aren't sophisticated enough to be doing portfolio math). Also, it is no coincidence that the worst affected countries (Germany/Japan) are those with risk-averse populations, crazy central bankers, and completely dysfunctional banking sectors.
The alternative is: property, commodities, private business, etc. But remember, the financial world has gone crazy...but the rest of the world is just going on as normal. This is part of the problem: central bankers believed they were geniuses and could control the real economy by fiat...well, they can't. Their world will go down in flames but everything else will likely continue as normal. Investing is not about risk-free rates or volatility/beta-adjusted portfolios, it is about providing capital to business for growth. These opportunities still exist, the financial world of central banks is (these days) unrelated to this.
It's not unrelated at all. It's the central banks policies that are pushing the economy out of balance. These policies obfuscate the real risks that come with investing, like defaults and money-losing investments. Greece, a country close to default a few years ago and with a debt-to-GDP ratio of 180% in a currency it cannot print manages to have a 10Y yield of ~2%.
Not predicting any doomsday but I believe in the upcoming years EU banks will slowly push the negative interest rates down to consumers, as they have no alternative. Their business model of borrowing-short and lending-long is no longer sustainable.
Also, on the long run, these policies have the effect of shrinking the middle-class, increasing inequality and polarising societies.
The amount of compounding leverage here between all parties would mean the system would implode if bonds went the other way for a longer duration. Maybe this threat of implosion only further accelerates lowering of rates as there is no alternative and even systemic deflation risk.
Gold as an asset class does well in periods of low real interest rates. All signs suggest we are going to be in a low real interest rate environment for sometime.
One of the nice things about investing in gold miners over just gold is in trying to find the best ones. There is real alpha in this as not all gold mines and gold miners are equal.
I'm not sure what bank you are referring to in the first sentence. These are bonds issued by the country.
> I'm not sure what bank you are referring to in the first sentence. These are bonds issued by the country.
The purchasing institutions, not the issuing. These mostly banks aren't just giving money away, and they don't really have costs associated with carrying base money since they can just ship cash back to the central bank for reserve credit, i assume under most conditions.
And the can always go elsewhere in the eurozone for yield, but they seem to need bunds for particular reason. not sure, i just pretty sure they aren't giving money away for no reason. they could even lay off currency risk and go for US Tsy.
Otherwise? No.
It is only worth it if you can time it precisely: https://www.macrotrends.net/1333/historical-gold-prices-100-...
The point of holding gold isn't to increase your returns, but to reduce the volatility of a diversified portfolio.
It is specifically geared to underperform it in markets like this, so it's doing its job.
There are reasons to hold commodities and precious metals like gold/silver, but they are pretty specific and for retail investors usually circle the idea of hedging against your first-party currency.
While gold and precious metals assets can appreciate in these times, at some point paper gains need to be converted into cash, so make sure you can liquidate your holdings if you need to. Many crypto investors for example have been burned by being unable to convert their gains into cash due to exchange related shenanigans.
I'd guess the gold market is more mature in that regard, but I've never invested so I don't know what it's like for consumer-level investors.
Now that many bonds aren't necessarily meeting my definition of a productive asset (small or negative yields for the safest bonds in Europe), I'm backtracking on my stance. The zero-interest rate world is weird.
Gold is, IMO, a disaster preparedness thing you buy after purchasing a shotgun, ammunition, and a month's worth of canned food. The main use case for gold is as highly portable physical wealth - in highly messed-up situations, you retain at lease some ability to engage in limited amounts of commerce to get yourself to a more stable situation.
The problem with "paper gold" of various sorts is that it usually winds up being a promise to give you a certain number of dollars based on the spot price of gold. This is a problem if dollars stop being of practical use.
There's still a hell of a lot of things that are better to do before buying physical gold here, of course. Bigger risk-mitigation moves are like, minor emergency preparedness, own-occupation disability insurance, term life insurance, and dumping a ton of money into the stock market for getting enough long-term price appreciation.
If a government (pretend US if it helps) stopped collecting taxes, and instead funded the budget by printing money every year, who would be the winners and losers compared to the current system? Where can I go to learn more?
Effectively, the government is being funded by all dollar holders at that point. It's a wealth tax of sorts imposed on those who hold their wealth in dollars.
The idea would be that the government is being funded by the fact that $100 today, is worth only about $90 last year, and that loss in value is what's funding the government.
The only explanations I can think of are that 1) many other countries are also doing significant deficit spending, so all major currencies are being devalued together, and so they're not actually being devalued at all, and 2) in as much as (ie) the US currency is being devalued faster than others, there are other, strengthening factors that are counteracting this. (Such as higher interest rates.)
Fiat currency is backed by value (not gold, but also not nothing like some people say). It's worth what we all collectively think it's worth and that's going to depend on the underlying assets of a nation.
Lets say there are $1T dollars floating around the economy and this year the Fed wants to print another 100bn. That's totally ok (and necessary) so long as there was that much value created this year. New factories have been built, businesses created, etc. This has created more underlying value in America and so it's ok that we print some more money. Your $1 bill still holds the same amount.
That's how I look at it at least.
Edit: not sure why I'm being downvoted for this...?
Which would mean that interest rates are (more or less) what CBs want them to be, at least within the bounds defined by inflation. Which presumably they want to be kept low presently.
If you can think of source, please let me know. Sounds interesting.
Edit: It also sounds fallacious to me. Interest rates are central-bank determined because the central bank chooses to determine them. In the absence of a central bank controlling rates, there undoubtedly would still be interest rates. There ostensibly also still would be risk free rates. In some hypothetical parallel Earth, the Fed might instead choose to control the price of some other commodity, like oil. That doesn't mean that the price of oil would be "endogenous" and therefore that there's no market price. Just that the Fed had chosen to suppress that market price. Thus, as far as I can tell, it still makes sense to ask the question "what would be the market risk free rate?"
John Quiggin, "Economics in Two Lessons: Why Markets Work So Well, and Why They Can Fail So Badly" (Princeton UP, 2019).
Media: https://traffic.megaphone.fm/LIT7223813423.mp3
... and if it's not, it's still a good interview to listen to (I'm giving it a repeat). Long, but informative.
The other likely candidate was a Marketplace Radio segment a few weeks back. I'd have to go hunting for that.
The upshot was that interest rates and/or bond markets might once have been nominally open/free markets, but with the actions of central banks, that's far less the case, and reading activities as market actions is now far harder to judge.
Stay invested in equities. Keep some cash on hand as an emergency fund in case you lose your job, but just don't sell your stocks when the market is down. Stay diversified and stay in the market.
Agree 100%. Always worth noting that you should have an asset allocation based on your risk profile. If you need the money to pay for your kids college and it is less than 5 years away, don't have it in stocks!
Beyond that, equity allocation makes sense. You want to walk the line between not being able to sleep at night because the market is cratering and not being able to sleep at night in 30 years because you don't have enough money saved to retire the way you want to.
Disclaimer: I like this stuff, but I am not a financial advisor.
I follow the traditional advice of doing nothing and not trying to time the market.
You're going to be contributing to this for years and years, so where the market was at when you invested your first dollar will be meaningless.
We've had 10 years of prosperity which should have been ample time to secure an emergency fund to weather the storm.
I have a six figure US stock position and I'm not going to change anything I do as long as I remain employed. Save for retirement/long term in the stock market, save for big ticket items in cash (I have a new car fund, for example). If I lose my job I'll have to stop contributions until I get another job. If I remain unemployed longer term I'd have to tighten my belt on frivolous purchases.
I used to have a mutual fund through my bank, where I'd set a monthly amount and they'd automatically deposit that into the fund from my chequing account. I decided to try something different since the reporting tools available through the online banking system were very basic.
Investing every two weeks into my standard allocation that I've decided on, rebalancing when necessary. Anything beyond that is speculation. Especially the concept of an inevitable storm coming. When, how, and where that happens is not something too many people know.
This seems like overly simple advice but it's the best advice you can listen to if you think there is a storm coming. Cutting spending and allocating that money to cash reserves while keeping your usual investment strategy (401k / Roth IRA / etc) is the most effective thing you can do.
Our entire civilization is held up on the promise that financial market indices go up over time, except for temporary recessionary periods. We just accept that retirees cashing out at the wrong time will be victims of 'collateral damage' during these 'market corrections'.
Everything from job growth, to the pension funds that you contribute to, to the municipal bonds governments issue to fund projects, rests on this one core assumption.
After dividends, you broke even after inflation (-0.096% return) if you dumped your life savings into the Nikkei in Jan 1990 and never invested another dime.
But if you kept investing incrementally over the years, like most people do, then annual returns went to 2.5% after inflation in 1995-2000, to 6.5% in 2005 and 9.4% in 2010.
Loosening monetary policy to fight deflationary pressure in the '90s also didn't seem to work because interest rates were already near zero. I think the US is different because the benchmark Fed rate is 2.25% now after many years of near-zero rates. So there's room to cut rates if needed.
[0]: https://en.wikipedia.org/wiki/Harrod%E2%80%93Domar_model
My take is that this trade war is irrationally based on animosity (even if the sentiment behind it is rational) so my hypothesis is when the tariffs are finally enacted you'll start to see a bigger shift as fund managers figure out that yes, the trade war is here.
Recession indicators have been in play for about 2 years. If nothing else, be much more aware of your high downside risk - and at least scenario model if we go down to multi-decade lows. Specifically in any items with negative EPShare, or not necessities. We're in the cycle now that hits equities -> mid-consumer spending -> business spending -> consumer spending -> real estate. Don't consider the specifics of this message, but the generalities and apply to life
Prepare for years of lower rates of return; If you own property, you will be able to re-fi in a few years to some very low rates. Cash is king for fire sales - lots of people will be going super broke the next 5 years. House prices will de-value enough, so don't buy property for the next 1-3 years. Stock market can revert to 50% of current values.
Edit: used this technique to purchase my first house, firesale. Will do it again this round, along with other lessons learned ;)
Edit 2: Listen to your own companies investor calls (if large enough) - you can predict upcoming layoffs. If you need a new job, do it now before wages stagnate or deflate some. Place yourself in a line of business that is close to a revenue stream of the business, they're rarely cut.
I don't follow. Are you saying don't buy until till the drop or, don't buy when it drops?
https://wolfstreet.com/2019/08/01/housing-bubbles-chicago-da...
The reason why bonds are trading at negative rates in the EU are the following:
* The ECB deposit rate is -0.40%. Everything else is benchmarked against that
* The majority of the EU is either currently in a recession or rapidly heading there
* Inflation expectations are weak