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Why would any entity buy bonds that when matured will not have kept up remotely with inflation? Obviously I'm missing some key idea here, I just have no idea wh
by SimbaOnSteroids 9y ago
Why would any entity buy bonds that when matured will not have kept up remotely with inflation? Obviously I'm missing some key idea here, I just have no idea what it is.
- jvm 9y agoLooking at RBS spreads here: http://www.bankofcanada.ca/rates/interest-rates/lookup-bond-yields/ http://www.bankofcanada.ca/rates/interest-rates/lookup-bond-... …looks like the market expects 1.57% inflation over the next 10 years, so these bonds are expected to beat inflation handily.
- feriancek 9y agoAs a hedge against a market collapse?
- X86BSD 9y agoLike gold and silver?
- QAPereo 9y agoMore like TP, antiobiotics, guns and ammunition.
- blobbers 9y agoIf TP made it to the top of your list of useful things in a societal meltdown, you need to spend a bit more time roughing it.
- astrodust 9y agoThose aren't as valuable in a crisis as you might think. Pure gold and junk gold are largely interchangeable. If you want to be ready for some societal meltdown, load up on junk gold. A small gold ring is easier to barter with than a gold brick.
- umanwizard 9y agoI bet drugs, canned food, and weapons/ammo are an even better thing to stock up on if you want to be ready for a TRUE meltdown, where civilization descends into total anarchy/lawlessness. But there is a pretty wide spectrum between that and what we have now. Gold is a hedge against something like what happened to Yugoslavia, even if it's not a good hedge against the apocalypse.
- astrodust 9y agoThe closest thing to the "apocalypse" you're likely to see is what happened in Argentina and what's happening in Venezuela. Having a "prepper bunker" full of expensive supplies is not an asset, it just makes you a target. Having a small cache of things you can easily hide, secure, and trade is significantly better. If you have to bail in your city because things get too ugly you don't need a trailer truck to move. Any normal person who needs more than a bug-out bag and a passport to survive is doing it wrong.
- ericd 9y agoYou can buy much smaller denominations too. There's something called the combibar which is a bar with a bunch of scored 1 gram pieces that you can snap off, like a chocolate bar. That said, I agree that gold is probably not that useful in a collapse.
- lmm 9y agoGovernment bonds are seen as ultra-safe, comparable to cash, and while 2.2% is not great it's better than 0%. Maybe they think inflation will stay low. My sense is that at the moment there's a lot of money sloshing around chasing not-so-great returns, so returns on everything are low - capital is subject to supply and demand like anything else.
- tomelders 9y agoIn essence, if you're got a pessimistic outlook, would you rather loose $10, or $100?
- JshWright 9y ago> Government bonds are seen as ultra-safe, comparable to cash, and while 2.2% is not great it's better than 0%. And much better than anything < 0%.
- oculusthrift 9y agoswiss and some german bonds have been known to sell for negative yield because losing a small gauranteed amount is better than losing a lot
- KekDemaga 9y agoHow would you lose value in cash in a way that you wouldn't with a bond?
- JshWright 9y agoBecause it may make more sense to free up the capital to put it in a better performing allocation. You'd sell the bond for a loss in order to get the cash to invest in something else.
- rjtavares 9y agoWhen you're talking about billions: If you hold it physically, you have to store it and secure it, which costs money. If you deposit it in a commercial bank, it'll be less safe than German bonds.
- ethbro 9y agoBecause you need somewhere to park $xxB. What are your other options?
- devrandomguy 9y agoBuild nation-scale infrastructure? Surely a major bank would benefit greatly, if indirectly, from any improvements in the national economy.
- icebraining 9y agoRight, George Parker.
- devrandomguy 9y agoWho is George Parker?
- pjc50 9y agoBanks (and other financial institutions). They more or less have to in order to make the books add up; or, in the clearing process, leave their money with another bank, most likely the central bank, which will pay little or no interest. If you try to leave your money with the Swiss Central Bank they will charge you 0.75%. Buying bonds is definitely preferable to that. https://www.snb.ch/en/ifor/finmkt/operat/id/finmkt_nz https://www.snb.ch/en/ifor/finmkt/operat/id/finmkt_nz
- victor106 9y agoAlso there are regulations that say that banks have to hold x% of there reserves in govt. issued bonds for those reserves to count as Tier 1 capital.
- scarhill 9y agoCanada's consumer price index hasn't exceeded 4% since 1990 and has averaged 1.74% since then. So investors who are buying those bonds could reasonably see things differently than you do.
- ericd 9y agoI don't get how that could possibly be true, given that the CAD has depreciated something like 30% in the past few years vs USD?
- umanwizard 9y agoNot everything bought in Canada is traded internationally and denominated in USD.
- ericd 9y agoSure, but some significant set of goods must come from abroad. The vast majority of clothing and electronics, for example.
- sdm 9y agoThe USD isn't some gold standard of truth. Like any currency it also appreciates and depreciates over time. You can't just look at the exchange rate between two currencies and make any meaningfully claims. Definitely, you can't make any claims about Canadian inflation by just looking at the exchange rate. When we went up to 1.10 it didn't cause deflation and when we went down to the low .70s we didn't see inflation.
- ericd 9y agoI don't mean it as some expression of hegemony or to demean Canada, it's just that USD is one of the major global reserve currencies, and a large percentage of international trade is conducted in USD. If it's your opinion that it has depreciated less against the other currencies that are commonly used in trade, I'm happy to hear about that. Given a depreciation against the trade currencies, I'd expect a large number of imports to get more expensive nominally, including many necessities like clothing. Maybe this isn't the case, and if it's not, I'd be very interested to hear why.
- ww520 9y agoInterest paying bond is very attractive in the face of deflation.
- module0000 9y agoThis is easy to answer. Because bonds(while "stable" over the long term), are volatile in the short-term(intraday). The answer to your question "why would any entity buy bonds..." is: to sell them moments later at a profit.
- nerfhammer 9y agoIf you assume markets price the bonds efficiently, then the price of the bond should contain what the market expects inflation will be over the duration of the bond at the time of the sale.
- BenoitEssiambre 9y agoThere is nothing unnatural about negative real returns on stores of value (even though negative nominal rates can create issues). Before financial systems existed, almost all investments had negative returns if you didn’t put work and energy into them. To store value, you had to accumulate stuff, buildings or land. Most options either had high maintenance costs, were subject to risk of damage from natural causes and theft, were very volatile or required hard labor to get production out of. Even in societies with financial systems, getting low risk, hassle free, liquid, positive real returns has been difficult for most of history. This just reflects the natural laws of thermodynamics that tell us that everything tends to decay without a constant supply of work and energy. In general, most things require maintenance to keep their worth. The 20th century was probably the most notable exception. Because of unprecedented demographic and technological growth, positive risk free real returns were easy to find. The recency effect probably explains some of the confusion people have about this. It is possible that under favorable conditions, wealth can have positive returns and even compound into very good long run returns but it is not a guarantee and there is nothing natural about it. It may not continue forever, particularly amidst an aging and retiring population in a world no longer as rich in easy to exploit natural resources.