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08-22-2019, 08:53 AM
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#1
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Gone but not forgotten
Join Date: Jul 2012
Location: Peru
Posts: 6,335
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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.
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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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__________________
If you want others to be happy, practice compassion. If you want to be happy, practice compassion.
--Dalai Lama XIV
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08-22-2019, 08:55 AM
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#2
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jan 2018
Location: Tampa
Posts: 11,196
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Why would one wish to buy these bonds vs. even a very low CD type interest rate?
__________________
TGIM
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08-22-2019, 08:56 AM
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#3
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Gone but not forgotten
Join Date: Jul 2012
Location: Peru
Posts: 6,335
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Quote:
Originally Posted by Dtail
Why would one wish to buy these bonds vs. even a very low CD type interest rate?
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That's what the article explains.
__________________
If you want others to be happy, practice compassion. If you want to be happy, practice compassion.
--Dalai Lama XIV
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08-22-2019, 09:01 AM
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#4
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jan 2018
Location: Tampa
Posts: 11,196
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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).
__________________
TGIM
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08-22-2019, 09:04 AM
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#5
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Thinks s/he gets paid by the post
Join Date: Sep 2002
Posts: 1,171
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I don’t see a way I would ever buy a negative interest rate bond. I’ll invest in alcohol, silver, and sandbags before this occurs.
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08-22-2019, 09:55 AM
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#6
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Gone but not forgotten
Join Date: Jul 2012
Location: Peru
Posts: 6,335
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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
__________________
If you want others to be happy, practice compassion. If you want to be happy, practice compassion.
--Dalai Lama XIV
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08-22-2019, 12:33 PM
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#7
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Recycles dryer sheets
Join Date: Jun 2017
Posts: 98
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Quote:
Originally Posted by JDARNELL
I don’t see a way I would ever buy a negative interest rate bond. I’ll invest in alcohol, silver, and sandbags before this occurs.
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...ammo
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08-22-2019, 12:40 PM
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#8
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Recycles dryer sheets
Join Date: Apr 2015
Posts: 100
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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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08-22-2019, 02:29 PM
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#9
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Gone but not forgotten
Join Date: Jul 2012
Location: Peru
Posts: 6,335
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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?
__________________
If you want others to be happy, practice compassion. If you want to be happy, practice compassion.
--Dalai Lama XIV
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08-22-2019, 02:34 PM
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#10
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Thinks s/he gets paid by the post
Join Date: Mar 2012
Posts: 3,925
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Quote:
Originally Posted by AnonEMouse
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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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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08-22-2019, 04:50 PM
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#11
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Full time employment: Posting here.
Join Date: Aug 2019
Posts: 691
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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!
__________________
--At what age does spending less now in order to have more later stop making sense?
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08-23-2019, 05:45 AM
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#12
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Thinks s/he gets paid by the post
Join Date: Oct 2008
Posts: 2,775
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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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08-23-2019, 07:25 AM
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#13
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Thinks s/he gets paid by the post
Join Date: Oct 2016
Location: The Shire
Posts: 1,504
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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
Quote:
Fun fact: 1 billion dollars in 100 dollar bills weighs 20,000 pounds.
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__________________
Paying it forward is the best investment.
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08-23-2019, 09:57 AM
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#14
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Thinks s/he gets paid by the post
Join Date: Jan 2012
Posts: 2,581
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08-23-2019, 10:01 AM
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#15
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: May 2004
Location: SW Ohio
Posts: 14,404
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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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08-23-2019, 10:04 AM
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#16
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Thinks s/he gets paid by the post
Join Date: Jun 2016
Posts: 1,951
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Quote:
Originally Posted by samclem
In a negative interest rate environment, what happens to a oldsters who get a reverse mortgage on their home?
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Same as before. The lien holder gets your home.
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Have you got change for a quadrillion-dollar bill?
08-23-2019, 11:07 AM
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#17
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Thinks s/he gets paid by the post
Join Date: Oct 2016
Location: The Shire
Posts: 1,504
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Have you got change for a quadrillion-dollar bill?
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.
__________________
Paying it forward is the best investment.
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08-23-2019, 11:31 AM
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#18
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Thinks s/he gets paid by the post
Join Date: Jun 2016
Posts: 1,951
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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...
Place your bets and spin the wheel. Its the only game in town and everyone is required to play.
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08-24-2019, 09:40 AM
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#19
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Dryer sheet aficionado
Join Date: Apr 2016
Posts: 29
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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?
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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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08-24-2019, 03:25 PM
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#20
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: May 2004
Location: SW Ohio
Posts: 14,404
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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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