5 ms·

I own German Bundesanleihe and I wonder what stops anyone buying units that were released 20 years ago. Some of them yield around 4%. Of course they expire with

by ctas 8y ago

I own German Bundesanleihe and I wonder what stops anyone buying units that were released 20 years ago. Some of them yield around 4%. Of course they expire within the next 4-8 years which is still enough time to profit. Maybe I'm missing something...

kbwt 8y ago
Simple. You can only get old bonds on the market, where that surplus is priced in.
benj111 8y ago
A $100 bond is released paying 4% ($4 per year). If the prevailing interest rate drops than the bond price will increase to compensate. Say if the prevailing interest rate drops to 1%, then you will need to spend much more to buy that bond. Now it probably wont be as high as $400 because when you redeem the bond you'll only get back $100 thus suppressing your effective yield further , but that's the basic gist.
sacado2 8y ago
So you have a €100 bund that will yield €4 interest at the end of the year, plus the €100 of the original capital that will be sold back to you (it is a 19-year-old 20 years bund, so it will be paid back at the end of the year), so you will be paid €104 at the end of the year. At the same time, new 1 year bunds cost €100 and will be payed back only €99.9. As a lucky owner of a luctrative bund, why would you sell it €100 on the market? In less than a millisecond, you could find people that would happily buy it €104.1 and get almost all their money back, guaranteed, at the end of the year. As a client, you are as likely to find a fool that will sell a €104 check from the German treasury for less than €104 as to find a fool selling a €100 banknote for less than €100 (actually, the latter is more likely, for liquidity reasons).
- benj111 8y ago
  Actually, in your example, the traders would be all over your 10 year bond. The 1 year bond is yielding -0.1%. The 10 year bond is yielding more (-0.096%).
  - deleted 8y ago
    [deleted]
- rightbyte 8y ago
  I don't get it. Why would anyone buy a 99,9 return for 100 or 104 return for 104,1. Are the bounds a token for large bills or what? If 100'000 € bills existed, would founds etc. get those instead? Is there a tax on cash or something. Finance always seems like a big scam to me. It doesn't make any sense and the truth is protected by a guild of banksters under layers of complex hard to access rules and what not.
  - JanSt 8y ago
    You don't get it so it it's a scam?
    - rightbyte 8y ago
      It seems like a scam. I'm feeling scammed when I'm buying stock with a 30 min delay on pricing and orders becouse I'm not hooked up to the really expansive investor network. I'm feeling scammed when I can't buy real estate obligations directly but have to indirectly buy it via some expensive fund. I'm feeling scammed when Master Card charges x.x% of every transaction I do with my bank card and it doesn't even show up on the recipe. But maybe it's just me. It's not really a scam since I know I'm being scammed, than it's just business I guess.
      - ethbro 8y ago
        The answer is that no work in life is free. Everything you pointed to is a transaction cost (or, equivalently, a limitation to reduce the number of actors to a manageable number). You're paying for the work to make that thing happen. And, thank god, financial and medical industries are largely precluded from offering free services (a la Google) in exchange for selling every scrap of your data.
        rightbyte 8y ago
        Ye, well agree I get that. But the price of the banks services is in no way justified by the value added? A 2% card fee is 24 minutes off a 40h work week spending half your wage with card. It's like going to the physical bank and withdrawing money saves you time if you are near by anyways (pretending the card fee was added to the recipes as a cost). If you make 1000 USD a week, that's 10 USD or having 20 letters sent all over the country being delivered by hand every week. Card purchases are not being manually reviewed by the bank anymore like the old photo copy ones, but we still pay for it. It's just insane how this arcaic system prevails and how much profit can be squeezed out off it. I guess with card fee's the main problem is that the consumer is not paying it directly, and the companys don't have the guts to openly put the cost on the consumer.
maxxxxx 8y ago
The higher yield is already priced in. You are not the first with this idea :-)
paulpauper 8y ago
those are above par
rahimnathwani 8y ago
To buy (on the open market) a 100 EUR zero-coupon bond issued by Germany, with 4 years left, you would need to pay more than 100 EUR. i.e. your reward for waiting for 4 years would be that you'd get almost all your money back. 10 year bonds yield just over zero. 5 years and lower yield even less than zero: https://www.bloomberg.com/markets/rates-bonds/government-bonds/germany https://www.bloomberg.com/markets/rates-bonds/government-bon... https://www.ecb.europa.eu/stats/financial_markets_and_interest_rates/euro_area_yield_curves/html/index.en.html https://www.ecb.europa.eu/stats/financial_markets_and_intere...
mruts 8y ago
What you’re talking about is the coupon, not the yield. Say you have Bunde that was sold at 100 EUR. The coupon is 4 EUR. So the coupon is 4%. The yield however depends on the current market price. To calculate the yield you take the coupon and divide it by the current market price. Because bonds mature into each other, that is a 5-year issued 4 years ago should be the same as a 1-year issued today, both bonds will have the exact same yield. So effectively all the old bonds turn into new bonds, all linked to the same yield. This is why yields can be negative, it’s not like a negative yield bonds means you are paying someone. It just means that the price is so high the effective return is negative (remember that you get the face value of bond back after it matures) One exception to this rule is newly issued bonds. Because of regulations and rules, some institutional investors must buy bonds direct from the treasury. This means that they often trade a premium (they have a lower yield) compared to old bonds. Bonds can be a little counterintuitive because when bond prices go up, yields go down. So negative yields actually mean that market is very bullish. You might then ask, why would anyone purchase a negative yield bond? Well, there are a couple different reasons: a) they have to, due regulations or internal rules. b) they are speculating on interest rates or currency. Or c) they are speculating on the bond market (related to b). Bonds can be complicated because they have exposure to a lot of factors: rates, inflation, equities, debt, etc. But they are useful instruments because they have intrinsic value: they simply pay a fixed coupon and then the principal after N-years.
- baybal2 8y ago
  > You might then ask, why would anyone purchase a negative yield bond? Well, there are a couple different reasons: a) they have to, due regulations or internal rules. b) they are speculating on interest rates or currency. Or c) they are speculating on the bond market (related to b). d) they expect them to go down even further
  - gdieowkbdnd 8y ago
    That’s what “speculating on the bond market” means.
- jorblumesea 8y ago
lordnacho 8y ago
I used to trade on a fixed income desk, which includes trading bunds. What you are quoting is the coupon, not the yield. What this means is that back then if you bought 100 worth of the bond, you'd get a promise from the government to give you 4 back each year, plus the principal when the bond matured. It is not quite the same as the yield. Now consider if later a bond came out that paid 8 each year per 100 that you invested. The ones that pay 4 are still around. What would happen? Well you would be able to buy the old 4 coupon bonds at 50 from the old buyers (the government will still give you 100 at the end). That is the price that makes the yield the same. Why is this the case? Why don't the people who bought the 4s simply insist on getting 100 for their bonds? Because if they did, everyone would just spend their 100 EUR on the 8s. And that would continue to be the smartest thing to do until the 4s yielded the same as the 8s. Simplified a bit, so no convexity, term premium, on-the-run premium, repo rate, futures, basis and so on. But worth googling if you're interested.

by ctas 8y ago

kbwt 8y ago

Simple. You can only get old bonds on the market, where that surplus is priced in.

benj111 8y ago

A $100 bond is released paying 4% ($4 per year). If the prevailing interest rate drops than the bond price will increase to compensate. Say if the prevailing interest rate drops to 1%, then you will need to spend much more to buy that bond. Now it probably wont be as high as $400 because when you redeem the bond you'll only get back $100 thus suppressing your effective yield further , but that's the basic gist.

sacado2 8y ago

So you have a €100 bund that will yield €4 interest at the end of the year, plus the €100 of the original capital that will be sold back to you (it is a 19-year-old 20 years bund, so it will be paid back at the end of the year), so you will be paid €104 at the end of the year. At the same time, new 1 year bunds cost €100 and will be payed back only €99.9. As a lucky owner of a luctrative bund, why would you sell it €100 on the market? In less than a millisecond, you could find people that would happily buy it €104.1 and get almost all their money back, guaranteed, at the end of the year. As a client, you are as likely to find a fool that will sell a €104 check from the German treasury for less than €104 as to find a fool selling a €100 banknote for less than €100 (actually, the latter is more likely, for liquidity reasons).

benj111 8y ago
Actually, in your example, the traders would be all over your 10 year bond. The 1 year bond is yielding -0.1%. The 10 year bond is yielding more (-0.096%).
- deleted 8y ago
  [deleted]
rightbyte 8y ago
I don't get it. Why would anyone buy a 99,9 return for 100 or 104 return for 104,1. Are the bounds a token for large bills or what? If 100'000 € bills existed, would founds etc. get those instead? Is there a tax on cash or something. Finance always seems like a big scam to me. It doesn't make any sense and the truth is protected by a guild of banksters under layers of complex hard to access rules and what not.
- JanSt 8y ago
  You don't get it so it it's a scam?
  - rightbyte 8y ago
    It seems like a scam. I'm feeling scammed when I'm buying stock with a 30 min delay on pricing and orders becouse I'm not hooked up to the really expansive investor network. I'm feeling scammed when I can't buy real estate obligations directly but have to indirectly buy it via some expensive fund. I'm feeling scammed when Master Card charges x.x% of every transaction I do with my bank card and it doesn't even show up on the recipe. But maybe it's just me. It's not really a scam since I know I'm being scammed, than it's just business I guess.
    - ethbro 8y ago
      The answer is that no work in life is free. Everything you pointed to is a transaction cost (or, equivalently, a limitation to reduce the number of actors to a manageable number). You're paying for the work to make that thing happen. And, thank god, financial and medical industries are largely precluded from offering free services (a la Google) in exchange for selling every scrap of your data.
      - rightbyte 8y ago
        Ye, well agree I get that. But the price of the banks services is in no way justified by the value added? A 2% card fee is 24 minutes off a 40h work week spending half your wage with card. It's like going to the physical bank and withdrawing money saves you time if you are near by anyways (pretending the card fee was added to the recipes as a cost). If you make 1000 USD a week, that's 10 USD or having 20 letters sent all over the country being delivered by hand every week. Card purchases are not being manually reviewed by the bank anymore like the old photo copy ones, but we still pay for it. It's just insane how this arcaic system prevails and how much profit can be squeezed out off it. I guess with card fee's the main problem is that the consumer is not paying it directly, and the companys don't have the guts to openly put the cost on the consumer.

maxxxxx 8y ago

The higher yield is already priced in. You are not the first with this idea :-)

paulpauper 8y ago

those are above par

rahimnathwani 8y ago

To buy (on the open market) a 100 EUR zero-coupon bond issued by Germany, with 4 years left, you would need to pay more than 100 EUR. i.e. your reward for waiting for 4 years would be that you'd get almost all your money back. 10 year bonds yield just over zero. 5 years and lower yield even less than zero: https://www.bloomberg.com/markets/rates-bonds/government-bonds/germany https://www.bloomberg.com/markets/rates-bonds/government-bon... https://www.ecb.europa.eu/stats/financial_markets_and_interest_rates/euro_area_yield_curves/html/index.en.html https://www.ecb.europa.eu/stats/financial_markets_and_intere...

mruts 8y ago

What you’re talking about is the coupon, not the yield. Say you have Bunde that was sold at 100 EUR. The coupon is 4 EUR. So the coupon is 4%. The yield however depends on the current market price. To calculate the yield you take the coupon and divide it by the current market price. Because bonds mature into each other, that is a 5-year issued 4 years ago should be the same as a 1-year issued today, both bonds will have the exact same yield. So effectively all the old bonds turn into new bonds, all linked to the same yield. This is why yields can be negative, it’s not like a negative yield bonds means you are paying someone. It just means that the price is so high the effective return is negative (remember that you get the face value of bond back after it matures) One exception to this rule is newly issued bonds. Because of regulations and rules, some institutional investors must buy bonds direct from the treasury. This means that they often trade a premium (they have a lower yield) compared to old bonds. Bonds can be a little counterintuitive because when bond prices go up, yields go down. So negative yields actually mean that market is very bullish. You might then ask, why would anyone purchase a negative yield bond? Well, there are a couple different reasons: a) they have to, due regulations or internal rules. b) they are speculating on interest rates or currency. Or c) they are speculating on the bond market (related to b). Bonds can be complicated because they have exposure to a lot of factors: rates, inflation, equities, debt, etc. But they are useful instruments because they have intrinsic value: they simply pay a fixed coupon and then the principal after N-years.

baybal2 8y ago
> You might then ask, why would anyone purchase a negative yield bond? Well, there are a couple different reasons: a) they have to, due regulations or internal rules. b) they are speculating on interest rates or currency. Or c) they are speculating on the bond market (related to b). d) they expect them to go down even further
- gdieowkbdnd 8y ago
  That’s what “speculating on the bond market” means.
jorblumesea 8y ago

lordnacho 8y ago

I used to trade on a fixed income desk, which includes trading bunds. What you are quoting is the coupon, not the yield. What this means is that back then if you bought 100 worth of the bond, you'd get a promise from the government to give you 4 back each year, plus the principal when the bond matured. It is not quite the same as the yield. Now consider if later a bond came out that paid 8 each year per 100 that you invested. The ones that pay 4 are still around. What would happen? Well you would be able to buy the old 4 coupon bonds at 50 from the old buyers (the government will still give you 100 at the end). That is the price that makes the yield the same. Why is this the case? Why don't the people who bought the 4s simply insist on getting 100 for their bonds? Because if they did, everyone would just spend their 100 EUR on the 8s. And that would continue to be the smartest thing to do until the 4s yielded the same as the 8s. Simplified a bit, so no convexity, term premium, on-the-run premium, repo rate, futures, basis and so on. But worth googling if you're interested.