Negative Interest Rates

[RobbieB]

Real good. I'm still keeping the life insurance dough with the Co as they pay me 2.5%

 

[pb4uski]

+1 Mine credited 3.31% the last policy year though it has been dropping each year and it may be about 3% this year.... but is 5% per annum since I started the policy 42 years ago.

 

[gerntz]

Gold pays more than negative interest bonds.

 

[SecondAttempt]

Germany negative interest...

https://apnews.com/f7eee4d172864885b246da733803ee6e

Interesting stuff ... maybe worth understanding as we go forward.
This could be serious.
Who's next?

I'm pretty sure this happens because some actors (pension funds, etc.) are required to have a fixed fraction in various bonds at all times. They must buy even in an unfavorable market.

If the unfavorable market persists their boards/legislatures relieve them of this burden usually.

For now though...opportunity!

 

[Music Lover]

Bonds would just be the start...eventually it would apply on all money. But first people have to be convinced to go fully cashless which would make it a lot easier to implement a negative interest rate

 

[NW-Bound]

Bonds would just be the start...eventually it would apply on all money. But first people have to be convinced to go fully cashless which would make it a lot easier to implement a negative interest rate

Brilliant! Scandinavian countries are already nearly cashless.

Imagine looking up your bank account on your smartphone. "Lemme see. I should have 1045 euros there. What's this 0.45 euros debit? Arghh it's the negative interest rate. I wonder what happens with my brokerage account. Darn, they sold some of my shares to get cash to debit the interest rate too".

There would then be no fear of a bank run. There's no way to get paper money, nowhere to hide. Would that spur people to spend it, to convert it into "stuff" before their money shrivels to nothin'?

Negative interest rate is not deflation if you cannot hoard it in real cash. Debiting it off people's bank account has a more direct effect compared to inflation that may be obtuse and not noticeable to some people. Taking money off people's account is like a punch in their gut.

I love this stuff. Life is getting more and more exciting.

 

[KenZ71]

Interesting subject

Initially TIPS were marketed as keeping up with inflation but what happens in a deflationary market? Do they have a earnings floor?

If guess my point is what vehicle would provide reasonable protection whichever direction the markets move in?

 

[Cessna152]

Interesting subject

Initially TIPS were marketed as keeping up with inflation but what happens in a deflationary market? Do they have a earnings floor?

If guess my point is what vehicle would provide reasonable protection whichever direction the markets move in?

Never tried it myself, but Harry Browne’s Permanent Portfolio is alleged to make your wealth survive during periods of prosperity, inflation, deflation, and recession.

Historical data suggests it does its intended job. The problem seems to be few turn out to have the discipline to stick to it.

 

[Spock]

This article sort of "tries to boil the ocean" by touching on everything from neg rates, illiquid markets, passive investing, etc. Whether or not you agree with it, the perspective is interesting.


Some points from the article:
* a negative yielding bond is not a bond, its a liability... 30% of global gov bonds now have neg yields if bought at current prices.

* "Zero and negative rates have accelerated the rise of passive strategies and ETFs. As an equity investor, looking at an environment of negative rates globally and knowing something is wrong, I should step to the side, prudently. This should curb equity excesses, and meanwhile keep the S&P below 2000. But such informed investor is no longer there: it is a renowned fact that between 70% and 90% flows daily (depending on the source being BAML, MS or Vanguard) on the S&P are passive. Passive vehicles have no need to overanalyse assets before buying."
* "portfolio management tools like Capital Asset Pricing Model (CAPM), Modern Portfolio Theory (MPT), Value At Risk (VAR), Risk Parity are all ill-equipped to handle a world of lasting negative interest rates."
* "Bonds as an asset class are in an existential crisis. But, if bonds are not bonds, it also means that a lot of ‘balanced portfolios’ out there – incidentally representing the bulk of asset allocation globally – are no longer ‘balanced portfolios’, but rather ‘long-only equity portfolios’, with some ‘cash’ to the side. Except the ‘cash’ is fake-cash, insofar as it can lose money too, and is likely to do so at some point down the road upon resurgence of inflation, default risk or confidence crisis."

https://www.zerohedge.com/news/2019...-fake-markets-imminent-daily-liquidity-crisis

 

[AnonEMouse]

The "negative interest rate" appear to be another form of Freigold, "money with an expiration date," something theorized in 1891 as a way to keep money moving instead of being hoarded and causing "poverty amid plenty."

https://www.npr.org/sections/money/2019/08/27/754323652/the-strange-unduly-neglected-prophet

 

[imoldernu]

If this were easy, it could be explained in a few paragraphs.
Basically what Spock said.

For a deeper understanding, try this:
https://en.wikipedia.org/wiki/Emergency_Economic_Stabilization_Act_of_2008

Even though most of us look back at 2008, and the bank buyout... the question is did we understand what happened and why?

I would suggest that negative interest rates are the equivalent of what led up to the market problems a decade ago. Eventually, this moves to the national debt, the increase in that debt, and the holders of that debt. Convoluted, yes, but the negative interest rates, are not independent of, but eventually because of the skyrocketing national debt.

 

[Spock]

A different perspective on "why" neg interest rates don't matter to the buyers:

Negative and record low yields make sense for reasons that have nothing to do with investments in negative and record low yields. You have to see these assets as balance sheet tools, repo reserves whose entire purpose is to allow a firm to weather a market storm which disrupts the normal characteristics of how the world truly operates. The cost of holding those reserves is immaterial to the survival characteristics which are contained within them.

https://www.alhambrapartners.com/20...hat-is-behind-record-low-and-negative-yields/

 

[Theo]

Germany is running budget surpluses. So in addition to asking why their bonds are selling at negative interest rates, we should be asking why they are issuing bonds at all.

 

[samclem]

Germany is running budget surpluses. So in addition to asking why their bonds are selling at negative interest rates, we should be asking why they are issuing bonds at all.

Or, German citizens could ask "Hey, the government can make money by loaning money--why not do more of that and lower taxes? If the govt can get funds from entities that are volunteering to give it, why take it through compulsion?" Of course, it's not that simple.

 

[jazz4cash]

I could never understand how weaker economies in Europe pay less interest on bonds than US.

 

[almost there]

Global redistribution of wealth attempt. Market prop up attempt here before the election etc. Wont last forever. We will see a recession one of these days. Rates are already low, so it wont go too much lower. (Not like last time when we were printing fools) Then rates will again rise. Am guessing 5-10 yrs down the road. And we should be back to historic "normal rates".
My best guess anyway.

 

[2177V]

A substantial article about the probabilities of negative interest rates.

https://apnews.com/f7eee4d172864885b246da733803ee6e

I doubt that the US Fed will let interest rates go negative since after the 2008 crash the US Fed dropped it to between zero and 0.5%. I believe the Fed realizes that US financial institutions may go bankrupt causing a panic just like the Lehman Brothers.

IMO, Europe went negative in order to stimulate the economy hoping that will increase borrowing and increase spending. The European government pays for the negative interest to prevent their banks from going bankrupt which means the European national debt increases. The European government wanted to avoid a recession which will create unemployment and unemployment increases political instability. Some europeans like to strike, riot, shutdown their country, and force their leaders to resign. However, it is my understanding that this plan is not working so they are working on another stimulus plan which will cause the government to go further into debt. Modern Monetary Theory of going into debt does not appear to be working.

Why are there buyers for bonds with negative interest rates? It is called TINA. There Is No Alternative. Losing 1/2 percent in a safe security is better to some buyers than losing a higher percentage in the European stock market which some European investors considered too risky.

I am just happy that I reallocated my 60/40 portfolio to 100% US treasuries about 6 weeks ago to lock in the relative higher interest rates. This means every time the Fed cut the interest rates, then treasuries's yield goes down but the value of my relatively higher interest rates treasuries goes up. I suspect the Fed will cut the interest rates to zero or 0.5% in 2020 and not let it go negative.

 

[almost there]

I doubt we will see 0-.5% again. Just dont see a "crisis" of the same magnitude as the last one. Just a plain old, normal, regular, cyclical recession...That wont drag on for years and years like the last one did. Bail outs & Printing money was not the answer. Nor was super low interest rates... One thing for sure, We will find out!

 

[Theo]

Or, German citizens could ask "Hey, the government can make money by loaning money--why not do more of that and lower taxes? If the govt can get funds from entities that are volunteering to give it, why take it through compulsion?" Of course, it's not that simple.

They have a large trade surplus. If they lowered taxes, they would run the risk of higher inflation with all the cash coming in from overseas flooding their economy.

 

[Spock]

Global redistribution of wealth attempt. Market prop up attempt here before the election etc. Wont last forever. We will see a recession one of these days. Rates are already low, so it wont go too much lower. (Not like last time when we were printing fools) Then rates will again rise. Am guessing 5-10 yrs down the road. And we should be back to historic "normal rates".
My best guess anyway.

Looks like the printing presses have been fired up again.
The Fed has been buying treasuries again for the last 2 weeks.
https://econimica.blogspot.com/2019/08/for-second-week-in-row-fed-buys.html
Though to throw shade on the article, it suggests the Fed was selling during QT... it wasn't... it was letting bonds mature and not replacing them vs. actually selling.

 

[Spock]

I doubt we will see 0-.5% again. Just dont see a "crisis" of the same magnitude as the last one. Just a plain old, normal, regular, cyclical recession...That wont drag on for years and years like the last one did. Bail outs & Printing money was not the answer. Nor was super low interest rates... One thing for sure, We will find out!

Historically the Fed has had to cut rates ~4-5% during recessions. Since rates started at about ~2.5% this time, there isn't headroom to cut that much in the next recession unless they go negative or QE/helicopter money again.

 

[Brat]

I remember the day when banks would charge an account holder for holding their money in a cash account. What you are discussing is a completely different scale but..

 

[almost there]

Historically the Fed has had to cut rates ~4-5% during recessions. Since rates started at about ~2.5% this time, there isn't headroom to cut that much in the next recession unless they go negative or QE/helicopter money again.

Somewhat agree, depends on inflation and where rates are. A 4-5% cut is fine when rates are 10%. With an average rate of 5.18% 4-5% cut is not the norm. Were in an odd spot. Record low unemployment, low inflation, low interest rates. Rates are not the only bullet available. They just like rate cuts it as it juices the stock market. Why rates never came back (sooner) last time (2011) is anyone's guess. 1st time in history.
This next one will be the opposite of the early 80's of high double digit int rates and 24% unemployment. 2 bad quarters is not the end of the world. Will see...... (Might just be a global re distribution of wealth, if your a conspiracy theorist)
LOL LOL

 

[jazz4cash]

I remember the day when banks would charge an account holder for holding their money in a cash account. What you are discussing is a completely different scale but..

I think many banks do this now unless you have a minimum balance and/or direct deposit waiver.

 

[cyber888]

When banks starts giving out 2.0% interest or lower for a 30 year mortgage year, then negative rates are here because inflation is 2.5% or higher.