5 ms·

With negative interest rates, it truly will make financial sense to put all of your money under the mattress, so to speak. In reality, keeping liquid cash will

With negative interest rates, it truly will make financial sense to put all of your money under the mattress, so to speak. In reality, keeping liquid cash will no longer make any sense whatsoever, and further push all other assets up in value, property and equities for example.

jnordwick 7y ago
Interest rates are always positive. You are referring to yields which are part interest rate and part trading issues. Yields can and do go negtaive from time to time from the trading issues around the products. The interest rate (as shown on the coupon payment on the bond) will always be positive. edit: let me add, I mean the consumer space. There can be some oddity in the bank-to-bank market because of various technical reasons, but it is extremely rare.
- beefield 7y ago
  There are mortgages in Europe which are indexed to Euribors, which have been negative for a while, and you have been able to end up having a mortgage where index + margin is below zero. Obviously banks argue that actually mathematics is wrong and negative numbers do not exist, so customer needs to pay more than what was originally agreed, and I am not sure if that issue has been sorted out in courts. What comes to interbank markets, it is far from rare and far from only technicalities, it is nowadays pretty normal that the floating leg of the swap pays negative interest rate. (In Euro, that is, USD has higher rates)
  - jnordwick 7y ago
    Euribor rates are just short end bank-to-bank reference pts. The interbank markets are mostly technically driven on the short end. Central bank policies (eg reserve requirements) play the largest role. And can you show me euribor-based long-term loan where the interest rate is negative? For the most part, banks have no need to loan unless compelled, so maybe where is some policy forcing them to? I would call those extremely strange technical factors.
    - beefield 7y ago
      > And can you show me euribor-based longe-term loan where the interest rate is negative? My old mortgage would have become technically negative a couple of years ago, but I was forced to prepay it due to selling my apartment before the rates went that far down. As I said, my understanding is that my bank would have refused to honor our contract, though, and insist there is a zero floor in my mortgage even if nothing like that was agreed when I took the loan, so in that sense you are right.
- kgwgk 7y ago
  > The interest rate (as shown on the coupon payment on the bond) will always be positive. Negative coupons would be quite difficult to implement but having a positive coupon doesn't really mean anything: bonds are not necessarily sold at the nominal price even when they are initially issued. "Henkel and Sanofi sell first negative yielding euro corporate bonds" https://www.ft.com/content/6fdfeee8-2045-3452-a55d-3744a90910b2 https://www.ft.com/content/6fdfeee8-2045-3452-a55d-3744a9091...
solotronics 7y ago
I still don't fully understand negative interest rates. So banks then have a negative penalty for holding cash?
- beamatronic 7y ago
  Supply and demand, and fear. Imagine a customer who needs safety more than a return. They are willing to put down $1 now in exchange for a GUARANTEE they will get 0.99 in 10 years.
- quaquaqua1 7y ago
  When sums of money are sufficiently large (millions or billions of USD), it sometimes makes sense to secure a very small loss (0.5% per year) than to park it in an account or fund or etc which could have a positive or negative yield (maybe you win maybe you lose). Also, to the original commenter, I will never put all my cash under the mattress. One break in and it's all gone. I currently have all my cash parked in a 1% interest checking account with strong protections and fringe perks. I am content with taking an extremely small loss on inflation while I wait for the market to eventually tank. It's been longer than I expected (2 years already), but I do not ever shed a tear over the what, $16,000 in pretax capital gains I theoretically could have made?
  - akozak 7y ago
    Why not at least buy a 1yr CD? Rates were around 2.5% last I checked.
    - astura 7y ago
      My money market account pays 2.5% interest. SoFi Money is at 2.25%. https://www.doctorofcredit.com/high-interest-savings-to-get/ https://www.doctorofcredit.com/high-interest-savings-to-get/
    - alasdair_ 7y ago
      Goldman is offering 2.25 percent on a basic savings account as well.
nostromo 7y ago
Keep in mind Modern Portfolio Theory, in which we measure the total return of a portfolio, not just the individual components. A huge number of retirement plans and endowments and pension programs will still hold negative yielding bonds, because they need to diversify their assets. In theory those safe government bonds will shoot up in price just as equities crash. Because these assets aren’t correlated, your long term return will actually be higher. So, yes, that is probably worth paying a bit of money for.
- SilasX 7y ago
  Is that really true when the yield is negative though? Wont investors just, like, go into checking accounts or safe deposit boxes when they need to flee to safety?
  - surfearth 7y ago
    For large institutional investors, government-backed securities can be safer than bank accounts, given that they need to invest sums that are much larger than deposit insurance (e.g. FDIC) limits.
  - myroon5 7y ago
    Recent related story titled: Safe Deposit Boxes Aren't Safe (nytimes.com) https://news.ycombinator.com/item?id=20545276 https://news.ycombinator.com/item?id=20545276
  - mruts 7y ago
    Holding cash almost always has a pretty bad negative rate, i.e inflation. Real rates of bonds might be negative, but they should always be bigger than inflation.
    - tempestn 7y ago
      The "real rate" is the rate after inflation. It can't be both negative and bigger than inflation.
turk73 7y ago
Already it seems like cash has an expiration date. I keep trying to explain to my kids how different cash was in the '80s versus now. How much less a dollar buys and what that means to them. We're fucked unless we get after the massive debt pile and do some kind of cleanup in our system. It will launch into hyperinflation if we don't.
amiga_500 7y ago
What if you cannot withdraw it because we move to digital only "cash"?
eyeball 7y ago
Time to gamble on bitcoin.

jnordwick 7y ago

Interest rates are always positive. You are referring to yields which are part interest rate and part trading issues. Yields can and do go negtaive from time to time from the trading issues around the products. The interest rate (as shown on the coupon payment on the bond) will always be positive. edit: let me add, I mean the consumer space. There can be some oddity in the bank-to-bank market because of various technical reasons, but it is extremely rare.

beefield 7y ago
There are mortgages in Europe which are indexed to Euribors, which have been negative for a while, and you have been able to end up having a mortgage where index + margin is below zero. Obviously banks argue that actually mathematics is wrong and negative numbers do not exist, so customer needs to pay more than what was originally agreed, and I am not sure if that issue has been sorted out in courts. What comes to interbank markets, it is far from rare and far from only technicalities, it is nowadays pretty normal that the floating leg of the swap pays negative interest rate. (In Euro, that is, USD has higher rates)
- jnordwick 7y ago
  Euribor rates are just short end bank-to-bank reference pts. The interbank markets are mostly technically driven on the short end. Central bank policies (eg reserve requirements) play the largest role. And can you show me euribor-based long-term loan where the interest rate is negative? For the most part, banks have no need to loan unless compelled, so maybe where is some policy forcing them to? I would call those extremely strange technical factors.
  - beefield 7y ago
    > And can you show me euribor-based longe-term loan where the interest rate is negative? My old mortgage would have become technically negative a couple of years ago, but I was forced to prepay it due to selling my apartment before the rates went that far down. As I said, my understanding is that my bank would have refused to honor our contract, though, and insist there is a zero floor in my mortgage even if nothing like that was agreed when I took the loan, so in that sense you are right.
kgwgk 7y ago
> The interest rate (as shown on the coupon payment on the bond) will always be positive. Negative coupons would be quite difficult to implement but having a positive coupon doesn't really mean anything: bonds are not necessarily sold at the nominal price even when they are initially issued. "Henkel and Sanofi sell first negative yielding euro corporate bonds" https://www.ft.com/content/6fdfeee8-2045-3452-a55d-3744a90910b2 https://www.ft.com/content/6fdfeee8-2045-3452-a55d-3744a9091...

solotronics 7y ago

I still don't fully understand negative interest rates. So banks then have a negative penalty for holding cash?

beamatronic 7y ago
Supply and demand, and fear. Imagine a customer who needs safety more than a return. They are willing to put down $1 now in exchange for a GUARANTEE they will get 0.99 in 10 years.
quaquaqua1 7y ago
When sums of money are sufficiently large (millions or billions of USD), it sometimes makes sense to secure a very small loss (0.5% per year) than to park it in an account or fund or etc which could have a positive or negative yield (maybe you win maybe you lose). Also, to the original commenter, I will never put all my cash under the mattress. One break in and it's all gone. I currently have all my cash parked in a 1% interest checking account with strong protections and fringe perks. I am content with taking an extremely small loss on inflation while I wait for the market to eventually tank. It's been longer than I expected (2 years already), but I do not ever shed a tear over the what, $16,000 in pretax capital gains I theoretically could have made?
- akozak 7y ago
  Why not at least buy a 1yr CD? Rates were around 2.5% last I checked.
  - astura 7y ago
    My money market account pays 2.5% interest. SoFi Money is at 2.25%. https://www.doctorofcredit.com/high-interest-savings-to-get/ https://www.doctorofcredit.com/high-interest-savings-to-get/
  - alasdair_ 7y ago
    Goldman is offering 2.25 percent on a basic savings account as well.

nostromo 7y ago

Keep in mind Modern Portfolio Theory, in which we measure the total return of a portfolio, not just the individual components. A huge number of retirement plans and endowments and pension programs will still hold negative yielding bonds, because they need to diversify their assets. In theory those safe government bonds will shoot up in price just as equities crash. Because these assets aren’t correlated, your long term return will actually be higher. So, yes, that is probably worth paying a bit of money for.

SilasX 7y ago
Is that really true when the yield is negative though? Wont investors just, like, go into checking accounts or safe deposit boxes when they need to flee to safety?
- surfearth 7y ago
  For large institutional investors, government-backed securities can be safer than bank accounts, given that they need to invest sums that are much larger than deposit insurance (e.g. FDIC) limits.
- myroon5 7y ago
  Recent related story titled: Safe Deposit Boxes Aren't Safe (nytimes.com) https://news.ycombinator.com/item?id=20545276 https://news.ycombinator.com/item?id=20545276
- mruts 7y ago
  Holding cash almost always has a pretty bad negative rate, i.e inflation. Real rates of bonds might be negative, but they should always be bigger than inflation.
  - tempestn 7y ago
    The "real rate" is the rate after inflation. It can't be both negative and bigger than inflation.

turk73 7y ago

Already it seems like cash has an expiration date. I keep trying to explain to my kids how different cash was in the '80s versus now. How much less a dollar buys and what that means to them. We're fucked unless we get after the massive debt pile and do some kind of cleanup in our system. It will launch into hyperinflation if we don't.

amiga_500 7y ago

What if you cannot withdraw it because we move to digital only "cash"?

eyeball 7y ago

Time to gamble on bitcoin.