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Negative Interest Rates
Old 08-22-2019, 08:53 AM   #1
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Negative Interest Rates

A substantial article about the probabilities of negative interest rates.

https://apnews.com/f7eee4d172864885b246da733803ee6e

Quote:
FRANKFURT, Germany (AP) — Imagine lending money to someone and having to pay for the privilege of doing so. Or being asked to invest and informed of how much money you’ll lose.

Sounds absurd, but increasingly that’s the global bond market these days. A rising share of government and corporate bonds are trading at negative interest yields — a financial twilight zone that took hold after the financial crisis and has accelerated on fear that a fragile global economy will be further damaged by the U.S.-China trade war.

On Wednesday, for the first time ever, the German government sold 30-year bonds at a negative interest rate. The bonds pay no coupon interest at all. Yet bidders at the auction were willing to pay more than the face value they would receive back when the bonds mature.
Quote:
Worldwide debt with negative rates has surged to $16.4 trillion from $12.2 trillion in mid-July and $5.7 trillion in October
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Old 08-22-2019, 08:55 AM   #2
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Why would one wish to buy these bonds vs. even a very low CD type interest rate?
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Old 08-22-2019, 08:56 AM   #3
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Originally Posted by Dtail View Post
Why would one wish to buy these bonds vs. even a very low CD type interest rate?
That's what the article explains.
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Old 08-22-2019, 09:01 AM   #4
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That's what the article explains.
Okay just read it. I don't know, it just seems a little strange still, but perhaps due to the USA not being at these levels (yet).
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Old 08-22-2019, 09:04 AM   #5
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I donít see a way I would ever buy a negative interest rate bond. Iíll invest in alcohol, silver, and sandbags before this occurs.
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Old 08-22-2019, 09:55 AM   #6
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It's been a long time, now, but a hard look at what happened from 2007, to 2008, will go a long way to explain the potential for the possibilities for a repeat. Do you really remember what happened with the banks?
In 1980, the National debt was 1 Trillion Dollars... In 1990 5 Trillion, in 2008 10 Trillion dollars and today 23 trillion. Your individual taxpayer part of the national debt is $183,000.

https://www.cbo.gov/publication/55151

This isn't easy, but if you're looking beyond 10 years, it would be good to understand the trend, and what the negative interest rates portend.

More on Investopedia:

https://www.investopedia.com/terms/n...erest-rate.asp
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Old 08-22-2019, 12:33 PM   #7
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I donít see a way I would ever buy a negative interest rate bond. Iíll invest in alcohol, silver, and sandbags before this occurs.
...ammo
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Old 08-22-2019, 12:40 PM   #8
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And inevitably it leads to a negative interest rate mortgage:

https://www.theguardian.com/money/20...-rate-mortgage

On the surface it seems implausibly good - I'd sign up for a $1 billion mortgage and live off the -0.6% interest payment. Unfortunately the bank always gets its due - fees would mean you end up paying something, so you don't actually end up with a net positive. Pity, because it would've solved the retirement equation for everyone at once.
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Old 08-22-2019, 02:29 PM   #9
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Germany negative interest...

https://apnews.com/f7eee4d172864885b246da733803ee6e

Interesting stuff ... maybe worth understanding as we go forward.
This could be serious.
Who's next?
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Old 08-22-2019, 02:34 PM   #10
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And inevitably it leads to a negative interest rate mortgage:

https://www.theguardian.com/money/20...-rate-mortgage

On the surface it seems implausibly good - I'd sign up for a $1 billion mortgage and live off the -0.6% interest payment. Unfortunately the bank always gets its due - fees would mean you end up paying something, so you don't actually end up with a net positive. Pity, because it would've solved the retirement equation for everyone at once.
It doesn't work like that. And what is securing your $1 billion mortgage? A $1 billion mansion?

Your mortgage is still amortized. Just at the end, instead of having paid more than the amount of money you borrowed, you'd pay a total somewhat less. But you still have to make those monthly mortgage payments for the life of the mortgage.

Now, what this leads to is overpriced real estate and a higher property tax bill. Should rates ever go back up, the housing market would fall apart and you'd be stuck with your $1 billion mansion that might only fetch $600 million.
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Old 08-22-2019, 04:50 PM   #11
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This is one of those things that doesn't make sense, like offering home loans without verifying income. That happened because there was too much demand for "safe" mortgages to buy.

I suspect a similar thing is happening here. There is just too much money looking for a safe place to park. Maybe this is how we can pay down the national debt? Wouldn't that be nice!
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Old 08-23-2019, 05:45 AM   #12
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As usual there is an elephant in the room no one is mentioning, which is the question "Why on earth wouldn't someone simply hold cash for 10 years and have 100% of his cash in 10 years, as opposed to buying a 10 year negative interest bond and having only 90% of his cash 10 years later?".
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Not as easy as it sounds
Old 08-23-2019, 07:25 AM   #13
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Not as easy as it sounds

Perhaps there are some logistics at work. Would your currency still be accepted if it got moldy or brittle or eaten by termites over many years? From the interwebs:

What 122.1 Trillion Dollars Looks Like | Sneakhype

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Fun fact: 1 billion dollars in 100 dollar bills weighs 20,000 pounds.
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Old 08-23-2019, 09:57 AM   #14
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Hahahah. Cool cartoon graphics gave a nice visual sense for what various amounts of cash look like. And I learned something else new: "hundo" is apparently a slang term for a hundred dollar bill. Don't think I'll be using that one, personally.
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Old 08-23-2019, 10:01 AM   #15
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In a negative interest rate environment, what happens to a oldsters who get a reverse mortgage on their home?
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Old 08-23-2019, 10:04 AM   #16
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In a negative interest rate environment, what happens to a oldsters who get a reverse mortgage on their home?
Same as before. The lien holder gets your home.
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Have you got change for a quadrillion-dollar bill?
Old 08-23-2019, 11:07 AM   #17
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Have you got change for a quadrillion-dollar bill?

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Hahahah. Cool cartoon graphics gave a nice visual sense for what various amounts of cash look like. And I learned something else new: "hundo" is apparently a slang term for a hundred dollar bill. Don't think I'll be using that one, personally.
I still call hundred dollar bills either "Benjamins" or "C-notes". Also, I will continue to refer to thousands as "large", in homage to The Sopranos.

However, if we were to encounter Weimar Republic hyperinflation, where the currency was denominated in trillions, we might have to recalibrate our slang again.
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Old 08-23-2019, 11:31 AM   #18
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Negative interest rates "doesn't compute" for a lot of people. It seems to break their paradigm or world view ("hoop" for those who read Black Elk Speaks in college philosophy class). They can't fathom how a world would work in which the value of $ NOW is greater than the value of a future $. (its called inflation/high inflation/hyperinflation).
Big names in finance/investment call it "insane" (Kyle Bass) or "totally nuts".



But. Rewind 10ish years ago and the Fed/US Gov response to the financial crisis seemed equally unfathomable: The Fed bought trillions (with a T) of USTs monetizing the debt. The US Gov could issue all the debt it wanted, the Fed would print the money into existence and buy those bonds. The very concept of monetizing the debt sounded like we were on the path to Banana Republic or Zimbabwe style inflation.


Yet 10 years later here we are happily patting ourselves on our backs at our prudent "buy anything" strategy that has the Dow still hovering around 25-26K, while the Fed is still buying USTs and MBS 10 years after the crisis was supposedly over. Other big Central Banks are also buying stock (BOJ owns something like 70% of all Japanese ETFs). Are these gains economically real? or did all that money printing/inflation just flow into the financial markets instead of the supermarkets?


Maybe the music will keep playing and markets will adapt to negative rates the same way it now expects/demands Central Banks to keep monetizing national debts and propping up markets at the slightest dip. Or maybe it will all just stop... euphemistically called "end badly".


Whoever is buying neg bonds at above par is going to lose money if held to maturity. Which means whoever is buying them now is depending on finding a buyer (greater fool) to take them off their hands later. That buyer will probably be the gov with the money printing equipment. There are other ways to implement MMT...



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Old 08-24-2019, 09:40 AM   #19
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Quote:
Originally Posted by John Galt III
Why on earth wouldn't someone simply hold cash for 10 years and have 100% of his cash in 10 years, as opposed to buying a 10 year negative interest bond and having only 90% of his cash 10 years later?
Because the cash purchase value (currency,FX,inflation) in 10 years will be worth even less than the depreciated bond which has both spun off dividend payments in those 10 years and can be resold at a known value.
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Old 08-24-2019, 03:25 PM   #20
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Just to throw this out there:
1) For those believing/worried that negative interest rates and low inflation might be the new normal and hang around for a long time, EE US Savings Bonds pay double the purchase price at the 20 year point (effective rate: 3.6%). Before the 20 year point, the rate is fixed and it is low (0.1% now), the 20 year point is a one-time catchup. But--$10K max annual purchase per person.

2) For those believing/worried that interest rates lower than inflation will be the new normal, TIPS are still out there. Real rates are very poor now by historic standards, a 30 year TIPS bond is yielding about .42% real. But it will probably be a >very< volatile ride.
3) I-bonds bought today have a real rate of 0.5%, and they can be redeemed without penalty after 5 years. Today's best CDs can beat that unless inflation goes above 2.75%. But, the I-Bond can keep earning interest for 30 years. A big problem is the purchase limit of $10K per person per year (plus an additional $5K of paper I-bonds using a tax refund)



None of these choices will make anyone rich. But, if $10K will buy 10,000 cans of beans this year, it should buy 10,800 cans of beans in 20 years if invested in I-bonds! Well, that's better than negative interest rates + inflation.
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