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Why bother investing it at the point? What’s the advantage over holding cash?

IkmoIkmo 8y ago
Because it's a non-negative return Because the ECB had negative rates for a while, i.e. some parties had to pay to hold cash. And lastly, because economic developments which don't affect cash, may affect bonds. i.e. if the interest rates drop, existing bonds will become more valuable. I don't expect this to happen, but the point is that you don't just buy bonds for their return today, but also in expectation for their relative return compared to the rest of the bond market in the future, i.e. their future value. That doesn't apply to cash in the same way.
JumpCrisscross 8y ago
> What’s the advantage over holding cash? Where do you hold the cash? Physically? As deposits in a bank? “Cash” is short hand. This article debates different forms of cash. (OTR sovereign bonds are usually considered cash.)
- JDiculous 8y ago
  How is a bond the same thing as cash? I can't walk into a supermarket and buy a loaf of bread with a sovereign bond.
  - drcharris 8y ago
    In the world of finance, "cash" is often shorthand for "cash or cash equivalents". Instead of the usual layperson interpretation where cash is "a bunch of currency, either physically in my hand or in a bank account", the meaning here is "stuff with incredibly low risk" i.e. you can be very sure that you'll not lose money over time. Sovereign debt, including bonds, is regarded as the safest type of debt and therefore falls into the 'risk-free' bucket in the finance world. Since cash is usually regarded as risk-free, the word "cash" has come to be a short-hand for "(almost entirely) risk-free assets".
    - repolfx 8y ago
      Yeah, but using the word "cash" that way isn't a good idea. I understand why they do it but it's still asking for trouble. For one, sovereign bonds are very obviously not risk free. Governments have a long history of going bankrupt or giving bond holders haircuts. They're treated as such because regulations passed by governments force them to be treated as such, which is clearly self-serving. The finance world is mixing up "we must pretend it's risk free" with "actually risk free".
      - njarboe 8y ago
        "Cash" is also not risk free. Probably higher risk than US, Japanese, German, or British bonds. In the current fiat era a country is more likely to print money than default on its bonds. Countries that have recently gone bankrupt or gave bond holder haircut, rarely can borrow in their own currency anywhere near the rates on US dollar denominated loans.
        repolfx 8y ago
        Printing money to pay a debt is defaulting in any sense that would be understood by a layman. The loan has technically been paid, but in a way that voided the point of requesting payment (transfer of value). Again, the fact that it's not considered that way says more about the finance industry than it does about ordinary terms like cash.
        drcharris 8y ago
        Credibility claimer: I built risk systems for 3 Tier-1 investment banks in a previous life. I'm not a fixed-income (read: bonds and other interest-rate derived financial instruments) person, but I think the erosion of 'value' via inflation is missing the point. Sovereign debt is the least risky form of debt there is, period. Everything else that's denominated in the same currency has more risk, not least due to the fact that the pricing of every financial instrument takes the risk of the sovereign debt into account aka the risk-free-rate. Yes, the absolute amount of risk of a sovereign debt is different depending on who controls a particular fiat currency - but in relative terms, any financial model will start with that baseline. Obviously, cash in that same currency bears some risk due to inflation, which is why people talk about 'real interest rates' that take that into account. If you lend someone money, you take risk, and you get interest as compensation. That risk includes your predictions of inflation, and the interest rate you are prepared to accept should include that too. If you don't like it, don't lend the money. Arguing about a 'transfer of value' implies that you have another way of representing value that is better than the currency itself. I can't think of one, but I'm open to suggestions.
- cynusx 8y ago
  It's deposits in a bank, yes. Many banks charge large deposit holders a negative interest rate. The alternative of holding it in actual cash, comes with security costs, storage costs,... The negative interest rate is still cheaper then the 1% annual cost of securing banknotes. It also puts an implicit floor on how low the central bank can lower the interest.
  - JumpCrisscross 8y ago
    > Many banks charge large deposit holders a negative interest rate Counterparty risk dominates, for most treasurers. You don’t want your billions of corporate deposits in the bank that went bust. Treasuries—or their local equivalent—are a safe way to hold cash.
fauigerzigerk 8y ago
Because cash yields -1.73% at best. Perhaps less if negative interest is charged on large deposits. And where do you store it safely?
deleted 8y ago
[deleted]

Because it's a non-negative return Because the ECB had negative rates for a while, i.e. some parties had to pay to hold cash. And lastly, because economic developments which don't affect cash, may affect bonds. i.e. if the interest rates drop, existing bonds will become more valuable. I don't expect this to happen, but the point is that you don't just buy bonds for their return today, but also in expectation for their relative return compared to the rest of the bond market in the future, i.e. their future value. That doesn't apply to cash in the same way.

JumpCrisscross 8y ago

> What’s the advantage over holding cash? Where do you hold the cash? Physically? As deposits in a bank? “Cash” is short hand. This article debates different forms of cash. (OTR sovereign bonds are usually considered cash.)

JDiculous 8y ago
How is a bond the same thing as cash? I can't walk into a supermarket and buy a loaf of bread with a sovereign bond.
- drcharris 8y ago
  In the world of finance, "cash" is often shorthand for "cash or cash equivalents". Instead of the usual layperson interpretation where cash is "a bunch of currency, either physically in my hand or in a bank account", the meaning here is "stuff with incredibly low risk" i.e. you can be very sure that you'll not lose money over time. Sovereign debt, including bonds, is regarded as the safest type of debt and therefore falls into the 'risk-free' bucket in the finance world. Since cash is usually regarded as risk-free, the word "cash" has come to be a short-hand for "(almost entirely) risk-free assets".
  - repolfx 8y ago
    Yeah, but using the word "cash" that way isn't a good idea. I understand why they do it but it's still asking for trouble. For one, sovereign bonds are very obviously not risk free. Governments have a long history of going bankrupt or giving bond holders haircuts. They're treated as such because regulations passed by governments force them to be treated as such, which is clearly self-serving. The finance world is mixing up "we must pretend it's risk free" with "actually risk free".
    - njarboe 8y ago
      "Cash" is also not risk free. Probably higher risk than US, Japanese, German, or British bonds. In the current fiat era a country is more likely to print money than default on its bonds. Countries that have recently gone bankrupt or gave bond holder haircut, rarely can borrow in their own currency anywhere near the rates on US dollar denominated loans.
      - repolfx 8y ago
        Printing money to pay a debt is defaulting in any sense that would be understood by a layman. The loan has technically been paid, but in a way that voided the point of requesting payment (transfer of value). Again, the fact that it's not considered that way says more about the finance industry than it does about ordinary terms like cash.
        drcharris 8y ago
        Credibility claimer: I built risk systems for 3 Tier-1 investment banks in a previous life. I'm not a fixed-income (read: bonds and other interest-rate derived financial instruments) person, but I think the erosion of 'value' via inflation is missing the point. Sovereign debt is the least risky form of debt there is, period. Everything else that's denominated in the same currency has more risk, not least due to the fact that the pricing of every financial instrument takes the risk of the sovereign debt into account aka the risk-free-rate. Yes, the absolute amount of risk of a sovereign debt is different depending on who controls a particular fiat currency - but in relative terms, any financial model will start with that baseline. Obviously, cash in that same currency bears some risk due to inflation, which is why people talk about 'real interest rates' that take that into account. If you lend someone money, you take risk, and you get interest as compensation. That risk includes your predictions of inflation, and the interest rate you are prepared to accept should include that too. If you don't like it, don't lend the money. Arguing about a 'transfer of value' implies that you have another way of representing value that is better than the currency itself. I can't think of one, but I'm open to suggestions.
cynusx 8y ago
It's deposits in a bank, yes. Many banks charge large deposit holders a negative interest rate. The alternative of holding it in actual cash, comes with security costs, storage costs,... The negative interest rate is still cheaper then the 1% annual cost of securing banknotes. It also puts an implicit floor on how low the central bank can lower the interest.
- JumpCrisscross 8y ago
  > Many banks charge large deposit holders a negative interest rate Counterparty risk dominates, for most treasurers. You don’t want your billions of corporate deposits in the bank that went bust. Treasuries—or their local equivalent—are a safe way to hold cash.

fauigerzigerk 8y ago

Because cash yields -1.73% at best. Perhaps less if negative interest is charged on large deposits. And where do you store it safely?

deleted 8y ago

[deleted]