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swiss and some german bonds have been known to sell for negative yield because losing a small gauranteed amount is better than losing a lot
by oculusthrift 9y ago
swiss 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.
- SilasX 9y agoWait, what? Isn't most money electronic anyway? How does it cost (O(n)) money to keep an entry in a digital record?
- umanwizard 9y agoI'm not an economist or finance expert so take the following with a grain of salt, but this is how I understand it... When you talk about "money being electronic" you're basically talking about bonds. When people (or companies, foreign governments, etc.) want to hold large quantities of USD they don't really hold USD, they hold short-term US government bonds. The only truly "real USD" is physical cash, or an account balance at the Federal Reserve (which is available only to banks). So people don't own bonds just because of the coupon, it's also really the only convenient way to own (something mostly equivalent to) currency -- other than keeping it in a private bank, which is much more likely to fail than the government.
- lurker456 9y agoThe odds of a commercial bank going bust is higher then Germany going bust. Commercial banks only need to keep a few % of the money deposited at them on their books (its called fractional reserve banking), the other 95% or so can be invested or lent out elsewhere. There are regulations that restrict the risk, require hedging, insurance, etc but those don't help much if the insurer or a significant amount of the borrowers go bust as well due to systemic problems.
- SilasX 9y agoBanks are allowed to loan out the money, but they don't have to, and could take business from the negative-yielding government bonds by just leaving the money alone, in their electronic reserve account.
- umanwizard 9y agoThen where is the bank supposed to keep their money? In another commercial bank? In cash? This creates an infinite regression problem... They could keep it in the Fed, but the Fed charges money for the privilege (and I assume so does the ECB and other equivalents)
- SilasX 9y agoBanks hold unloaned reserves already.
- umanwizard 9y agoHold them where? In cash?
- KekDemaga 9y agoI imagine I could hold cash safely for a fee less than 0.75%
- pjc50 9y ago> keep an entry in a digital record A record where, though? Bank "clearing" means that ultimately a bank is keeping its money either with other banks or with the central bank. They're records, but not necessarily interest-bearing, and keeping it with other banks is not risk-free.
- sliverstorm 9y agoFWIW we're used to thinking of bank deposits as risk free- but realize, FDIC insurance is capped at $250k! Bank deposits of large sums, then, carries some risk, which can be translated to cost/depreciation. (I realize we're talking about German banks, and FDIC is a US institution)