Is anyone betting on negative interest rates?

[tenant13]

I personally believe that the "real" economy is in tatters and there's no good news on the horizon. So I think that sooner or later Fed will become desperate and will lower interest rates to below zero following it with another round of QE.
Treasuries these days are on the verge of worthless (0.625% coupon rate) but if the rates go negative I could sell them for a quick buck.

 

[pb4uski]

No... but I didn't bet on interest rates declines when rates were positive either.

 

[LOL!]

How would one make such a bet and then make money from the bet?

 

[RetireBy90]

For quite some time I have been really confused as to negative rates. Who would loan you $100 for $97 in return 1 year later ? Are you kidding me ? However, there is a reason, not sure how likely. If we were to enter a period of deflation, then that roll of TP you can buy today for $1 would say cost $0.95 next year. In that case that $97 return would increase my purchasing power. I am not looking for negative rates and don't like the idea but if you are expecting a period of deflation or trying to protect against it then perhaps a negative rate is not as bad as it sounds, for your particular situation. I think if we get to that place then we have many other problems but there is at least one reason to accept a negative rate.

Just ramblings of an old man, pay no attention.

 

[njhowie]

How would one make such a bet and then make money from the bet?

Buy long-term fixed income assets now - bonds and treasuries. As rates go lower, prices of these assets will go higher and you can sell for capital gains.

 

[LOL!]

Buy long-term fixed income assets now - bonds and treasuries. As rates go lower, prices of these assets will go higher and you can sell for capital gains.

OK, so I sell them, then that means all bets are off and I have to do something next.

 

[RetireBy90]

OK, so I sell them, then that means all bets are off and I have to do something next.

You could then buy more TP

 

[Chuckanut]

I recently sold most of my medium and long term bond funds, so rates will probably approach zero very soon. My record at predicting interest rates is quite bad.

 

[njhowie]

OK, so I sell them, then that means all bets are off and I have to do something next.

Maybe you should re-read the question you asked.

You made money from your bet that rates would go negative. You won. So then you go bet on something else.

 

[calmloki]

For quite some time I have been really confused as to negative rates. Who would loan you $100 for $97 in return 1 year later ? Are you kidding me ? However, there is a reason, not sure how likely. If we were to enter a period of deflation, then that roll of TP you can buy today for $1 would say cost $0.95 next year. In that case that $97 return would increase my purchasing power. I am not looking for negative rates and don't like the idea but if you are expecting a period of deflation or trying to protect against it then perhaps a negative rate is not as bad as it sounds, for your particular situation. I think if we get to that place then we have many other problems but there is at least one reason to accept a negative rate.

Just ramblings of an old man, pay no attention.

Another old man, so.. Why not keep all your money in a hole in the ground? Then next year you can buy TP with a dollar, not $.97? My guess is that the bank is safer and also that maaybe there is some risk of a government deciding that they will change the face on the physical bills and declare all old bills worthless in four days, while declaring that only $10,000 in old bills can be changed each day.

 

[OldShooter]

I'm often an outlier and I am an outlier on this one I think. An interest rate is a number. All interest rates are numbers. If a number has a minus sign in front if it. that is interesting but not financially significant. Admittedly a minus sign has political and psychological effects, but so what? It's nothing a pipsqueek investor like me needs to worry about. I do not play on the central bankers' playing field.

@njhowie makes my point:

Buy long-term fixed income assets now - bonds and treasuries. As rates go lower, prices of these assets will go higher and you can sell for capital gains.

Exactly. This is true regardless of whether an interest rate has a minus sign in front of it or not.

 

[COcheesehead]

I'm often an outlier and I am an outlier on this one I think. An interest rate is a number. All interest rates are numbers. If a number has a minus sign in front if it. that is interesting but not financially significant. Admittedly a minus sign has political and psychological effects, but so what? It's nothing a pipsqueek investor like me needs to worry about. I do not play on the central banker's playing field.

@njhowie makes my point:
Exactly. This is true regardless of whether an interest rate has a minus sign in front of it or not.

...and this trade has worked for the better part of 2 decades.

 

[tenant13]

Buy long-term fixed income assets now - bonds and treasuries. As rates go lower, prices of these assets will go higher and you can sell for capital gains.

This. However, this is bond investing turned on its head since the purpose of buying a bond is to collect coupon rate every six months and get the 100% of the investment back. 10 yrs treasuries pay 0.625% now so they wouldn't even cover the inflation if I keep them until maturity. But IF interest rates do go down and IF the Fed ventures on another treasuries shopping spree and kicks in QE (very likely in the negative rates environment) then pocketing the gains will be a no brainer. You'd have to sell the bonds in the short window right after the drop - the longer you'd hold to the bond the less value it would have.

Obviously Fed could pump the brakes on the interest lowering and money printing and let the economy sort itself out but when was the last time it happened? Nobody in DC would ever allow that.

My assumptions are: 1. real economy is in terrible shape, 2. unless the underlying cause of this mess (pandemic) is somehow dealt with no amount of "re-opening" matters 3. there's no political will to let the market do what it does best 4. monetary policy will continue on its course

If I'm right negative rates are probable and I'll make money. If I'm wrong, I'll collect $625/year on 100k invested for the next 10 years and my 100k will be worth 50k when the bonds mature.

 

[OldShooter]

... my 100k will be worth 50k when the bonds mature.

Again the outlier, that is why I hold TIPS.

 

[Dtail]

I am also expecting that rates have a decent shot of going negative, but just not willing right now to go buy long term bond funds (in a TIRA) and sell when negative.

 

[njhowie]

This. However, this is bond investing turned on its head since the purpose of buying a bond is to collect coupon rate every six months and get the 100% of the investment back.

Of course. We all realize this. But then, aren't negative interest rates monetary policy turned on its head?

I'll pose the questions I fired off to the bozo economist at the St. Louis Fed who was in the news a couple weeks ago because he'd put out a paper indicating that negative interest rates may be required.

1. In which economic/finance/investing college course were negative interest rates introduced to you and discussed?

2. Ever had an exam question asking for the income stream produced by a negative yielding bond?

3. Can you provide a reference to any college textbook written prior to 2010 which covers negative interest rates?

4. Which of the fathers of economic theory proposed that negative interest rates were "a thing"?

5. Which of the countries that adopted negative interest rates have experienced the desired results of implementing them?

6. Of the countries which have utilized negative interest rates, which have gone back to positive rates?

The answers to these questions are obvious to most everyone. The fact of the matter is that negative interest rates are a farce - concocted by moronic central bankers to enable them to kick the can down the road for a few more years. The problem is that once you go negative, you're not going to go back. Negative interest rates do not provide any incentive for good behavior - acting fiscally responsible to "live within your means". If you and I have to live within our means, why shouldn't government? In what game do you get to have a printing press allowing you to mint an unlimited amount of money?

The longer we continue down this path, the more devastating the end result will likely be.

 

[jim584672]

To me it makes no sense. Why lend money and have to pay for the privilege, also take the risk of default, when you could literally put cash in the mattress and do better?

 

[tenant13]

The fact of the matter is that negative interest rates are a farce - concocted by moronic central bankers to enable them to kick the can down the road for a few more years. The problem is that once you go negative, you're not going to go back. Negative interest rates do not provide any incentive for good behavior - acting fiscally responsible to "live within your means". If you and I have to live within our means, why shouldn't government? In what game do you get to have a printing press allowing you to mint an unlimited amount of money?

The longer we continue down this path, the more devastating the end result will likely be.

I couldn't agree more - negative interest rates have been proven to do absolutely nothing when it comes to stimulating the economy, they are a terrible idea and should not be even considered by sound economists. Yet they became reality all over the world and given the pattern of Fed's behavior, their recent statements (“We're not even thinking about thinking about raising rates.") and the real possibility of US economy going into a deep recession - they might be coming. Oh, let's not forget that that US debt servicing would be easier. That must be tempting...

I hate the idea but just because I do, I can't wish it out of existence. So I might as well take the advantage of it.

 

[Mulligan]

To me it makes no sense. Why lend money and have to pay for the privilege, also take the risk of default, when you could literally put cash in the mattress and do better?

I would feel sorry for the in debt credit card crowd. Bank will borrow on short end, pay a slight negative cost and then tack that cost on top of the normal 21% interest rate.

 

[pb4uski]

I'm not sure how negative interest rates would work for individuals in the US. If bonds are negative, then people will just put their money in FDIC insured checking and savings accounts even if they pay a paltry 0.01% then it would be better than a bond yield.

It seems to me that in order for it to work that bank checking and savings accounts would have to be negative as well... and that would be so unpopular that I don't see that happening.... so I'm not sure how it would work.

Assuming that bank savings and checking accounts are not also negative, I would take my fixed income money and split it amoung FDIC insured accounts.

The other thing is that inflation is the base for the composition of interest rates in finance theory, so does that mean that we would also have deflation?

 

[njhowie]

If bonds are negative, then people will just put their money in FDIC insured checking and savings accounts even if they pay a paltry 0.01% then it would be better than a bond yield.

That's what most folks will do. However, it would not be optimal if interest rates are going "even lower" (more negative).

 

[Sunset]

I'm not sure how negative interest rates would work for individuals in the US. If bonds are negative, then people will just put their money in FDIC insured checking and savings accounts even if they pay a paltry 0.01% then it would be better than a bond yield.

It seems to me that in order for it to work that bank checking and savings accounts would have to be negative as well... and that would be so unpopular that I don't see that happening.... so I'm not sure how it would work.

Assuming that bank savings and checking accounts are not also negative, I would take my fixed income money and split it amoung FDIC insured accounts.

The other thing is that inflation is the base for the composition of interest rates in finance theory, so does that mean that we would also have deflation?

I'm thinking I will borrow $200 [-]Million [/-] Billion,
bury it and repay the $198 -> $199 Billion at the end of a year.

 

[njhowie]

I'm thinking I will borrow $200 [-]Million [/-] Billion,
bury it and repay the $198 -> $199 Billion at the end of a year.

And what collateral will you be putting up to secure the $200 billion?

 

[Red Badger]

To me it makes no sense. Why lend money and have to pay for the privilege, also take the risk of default, when you could literally put cash in the mattress and do better?

Exactly. Lending to the kids come to mind.

 

[jazz4cash]

I agree negative rates are a bad idea plus they don’t work. The market rather than the Fed might push rates below 0. I recently realized the cashback credit cards and even cards that don’t charge interest from the transaction posting date are like negative rates in our favor.