They pay YOU interest to take out a loan???

[ArkTinkerer]

I really don't understand what is going on here. There was talk of it coming to this but it still doesn't make sense. Paying to keep something on deposit might make sense in some cases where you are essentially paying for security but them paying YOU to take out a loan?

In "Paranormal" Europe, Banks Will Pay You To Borrow, And Charge You To Save | Zero Hedge

 

[Mulligan]

I was teasing a friend this week who hasn't met a loan he wouldn't take that he needs to move to Denmark. I told him as much debt as he has he could be a millionaire there in no time there.


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[pb4uski]

Maybe they have been smoking too much wacky-tobacky.

 

[Lakewood90712]

Wasn't this the land of Tulip Mania a few hundred years ago ?.

So it's worse for savers outside of the US.

World wide, the only things I see as "Safe" investments nearly immune to currency de-valuation are true collectibles , like fine art ( very hard to do) , and bargin priced rental property ( not available currently). I would not have a clue of how to find and buy art without getting taken on price. Metals and diamonds aren't really any protection, new diamonds are being mined, and so is gold.

 

[ArkTinkerer]

Its this kind of thing that made me start the thread on if Bonds still make sense in your AA. I don't think we're in Kansas anymore...

 

[jebmke]

If expected inflation is negative, the real rates may not be that much different from the US rate. Real rate on 10 year US notes is ~30bp.

 

[ArkTinkerer]

If inflation is expected to be negative you hold your cash. If you lend then someone still needs to pay you to compensate for the risk of default. Negative loan rate makes no sense!

 

[jebmke]

I guess you could buy T-Bills ... but they might have negative rates too. Once rates go negative, unless you are willing to sit on paper currency, you have to put it somewhere. Even rates on cash can go negative.

 

[imoldernu]

It makes perfect sense to me, but discussing it here gets too political. Think housing, futures and derivatives.

 

[MooreBonds]

I guess you could buy T-Bills ... but they might have negative rates too. Once rates go negative, unless you are willing to sit on paper currency, you have to put it somewhere. Even rates on cash can go negative.

Back in 2011, Mellon Bank had already taken the step to charge large depositors a 'fee' to hold their cash:

BNY Mellon Slaps Fee on Some Deposits Above $50 Million - WSJ

So wouldn't be a first in the US....but likely to be more common, starting with large commercial accounts.

 

[fanmail]

some possible reasons why someone would buy a negative interest rate bond

-Risk-averse investors might accept a negative yield as a sort of insurance premium to keep their money in a relatively safe and liquid debt instrument, as opposed to in a shaky bank.
-In a deflationary environment, the real – or inflation-adjusted – return on a bond with negative nominal interest could still be positive. For example, if a bond is yielding negative 1 per cent, but the consumer price index falls by 2 per cent, the investor’s purchasing power would still increase.
-If yields fall further into negative territory, the investor could make a capital gain because the price of the bond – which moves in the opposite direction to the yield – would rise.
-The investor might be speculating that the currency in which the bond is denominated will rise.
-The buyer of the bond could be an insurance company or pension fund that is required to purchase certain types of relatively safe assets, regardless of their yield.

 

[ERTX]

I noticed Coke and Apple got really good yields on Euro bonds in the last week. Japan has had negative/near negative savings rates for nearly 3 decades and it is extremely hard for them to retire because they are so risk adverse with their savings.

 

[ERTX]

Maybe they have been smoking too much wacky-tobacky.

Forcing people to take more risk and spend their savings to fend off deflation.

 

[ArkTinkerer]

-Risk-averse investors might accept a negative yield as a sort of insurance premium to keep their money in a relatively safe and liquid debt instrument, as opposed to in a shaky bank.

For a rational investor, the cost of the negative yield would need to be weighed against the costs of physical storage and security of paper currency or equivalents. Also against the spreading of funds across multiple accounts that are below the limits where they begin to charge fees and where FDIC insurance still applies.

-In a deflationary environment, the real – or inflation-adjusted – return on a bond with negative nominal interest could still be positive. For example, if a bond is yielding negative 1 per cent, but the consumer price index falls by 2 per cent, the investor’s purchasing power would still increase.
-If yields fall further into negative territory, the investor could make a capital gain because the price of the bond – which moves in the opposite direction to the yield – would rise.

Wouldn't both these cases be lower gain than keeping cash? Wouldn't the second case create a taxable event causing even greater disparity between cash and bonds?

-The investor might be speculating that the currency in which the bond is denominated will rise.

Hadn't thought about it as a currency investment. Still have to ask--why is this preferred to cash?

-The buyer of the bond could be an insurance company or pension fund that is required to purchase certain types of relatively safe assets, regardless of their yield.

This one I can see. Regulations don't care about reality and often lag the changing environment.

 

[ArkTinkerer]

Forcing people to take more risk and spend their savings to fend off deflation.

This is actually further than I see this going. There is no forcing people to spend. They are paying people to borrow money! If you are going to spend money on something anyway, assuming the up front fees are low enough, it makes sense to borrow if they will lend. Then conserve your other investments, or if you are particularly risk averse, liquidate investments to cash to hold until the loan is paid off.

During deflation isn't cash the least risky thing to hold?