Negative Interest Rates

[NW-Bound]

The title of "Negative Interest Rate" is misleading, if not outright wrong.

The bond has a zero coupon rate, meaning the bond buyer does not receive any interest payment at all for the 30-year duration. And at the end of the 30 years, he will get back less than his original principal.

The bond has a "Negative Yield" if held to maturity.

If the Germany government is successful in selling future bonds that are even more negative, then the current bond would be worth more. The lesser evil will become good!

Quote:

Originally Posted by xdafly 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.

See above. No interest payment ever in the 30-year life of the bond. And at maturity, you get back less than you give them. Your principal has shrunk.

[razztazz]

Quote:

Originally Posted by imoldernu A substantial article about the probabilities of negative interest rates. https://apnews.com/f7eee4d172864885b246da733803ee6e

Dang! I'm late to this. I've scanned many of the posts but the techno working of bonds to me, is something like tying a necktie. I understand it... but I don't quite understand it.

What this seems to be saying is, even with over a decade of people printing money to revivify economies everywhere, the biggest fear by "those in the know" is "deflation."

Back sometime after the 2000 crash when speculation of where it's all going was pervasive, someone said if you want to know where the economy is going watch what bond traders are doing.

Like many things about investing it probably has good insight sometimes, and not at others. But bond traders even more than "technical analysts" really do get paid to see into the future. That's what yields are ultimately about.

[Backdraft57]

Quote:

Originally Posted by TheRunningMan ...ammo

+1,000 rounds

[Ed B]

This thread feels like the opposite of a "Wheeee!" thread. I can only hope it has the opposite effect of a "Wheee! thread.

[pb4uski]

So these 3.0-3.5% APR credit union 5 year CD specials that some of us are scarfing up will look pretty good?

[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]

Quote:

Originally Posted by imoldernu 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]

Quote:

Originally Posted by 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

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]

Quote:

Originally Posted by 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?

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-...quidity-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/2...lected-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/Emerge...on_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:

Quote:

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/201...gative-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]

Quote:

Originally Posted by 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.

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.