4 ms·
Can someone explain the basics? Why buy a bond if it loses money? Why not hold cash?
by jotto 7y ago
Can someone explain the basics? Why buy a bond if it loses money? Why not hold cash?
- technobum 7y agoImagine Venezuela before the hyperinflation.
- your-nanny 7y agowhy
- dawhizkid 7y agoBank accounts are only FDIC insured (or equivalent) up to some limit. If you have hundreds of millions and would otherwise stuff that in a bank account buying bonds are a safe alternative to get around that limit.
- why_only_15 7y agoThat doesn't really make sense, because if you have hundreds of millions of dollars you can just hold the money yourself.
- Dylan16807 7y agoVaults cost money. Insurance costs money. And it's still not quite as safe. The ability to hold the money yourself acts as a soft cap on how negative rates can be, but that cap is not at 0%.
- deleted 7y ago[deleted]
- BurningFrog 7y agoOK, but is that really who is buying all these bonds?
- dawhizkid 7y agoYes, institutional money is driving push into bonds, not retail investors/individuals.
- BurningFrog 7y agoThanks. That clarifies this for me!
- mars4rp 7y agoBecause holding cash costs money, you need to have a big place to stash it and keep it secure. Some banks are trying to do that though, but it is not easy to do in scale of billions.
- UncleEntity 7y agoBanks hold their excess reserves at the Federal Reserve[0] and receive interest on top, currently 2.35%. Scales up to at least a couple trillion give or take a few hundred billion. [0] https://fred.stlouisfed.org/series/WRESBAL https://fred.stlouisfed.org/series/WRESBAL
- toast0 7y agoEuropean banks hold their excess reserves (or at least their required minimum reserves) at the European Central Bank or their country's central bank; all of which are currently charging interest for the privilege.
- anonuser123456 7y agoCash holdings still have risk for large amounts of capital. For example, if you had 1,000,000 in cash at a bank, it's only guaranteed up to 250,000. The other 750,000 is as risky as the institution. Compare this to a US treasury, which is substantially safer than any individual institution. Banks can and do fail, particularly during crisis... and during a crisis safe bonds (e.g. US Treasuries) will gain in value. I think there are a lot of people (like myself) that think it's only a matter of time before another major crisis... and are waiting to buy stocks at a steep discount.
- beamatronic 7y agoThis last part just has the effect of increasing the large amount of cash that ultimately someone is responsible for safe keeping in the meantime.
- ksherlock 7y agosome banks also have negative interest rates on large deposits.
- luminaobscura 7y agoHold cash how? If you mean holding in a bank. Some European banks are already charging negative rates for large deposits. They have to, because ECB is charging them. You see, all money is either physical or credit or excess reserves deposited at ECB. There is no electronic money outside of ECB system. If you mean physical, it's also costly. Vaults, protection etc. And to make this option harder, they cancelled the 500 Euro. If people starts piling up 200s, they will cancel that too.
- mmwelt 7y agoHow about in 1000 Swiss franc[1] notes? Perhaps this is also a reason why the Swiss franc rises so much in times of uncertainty? [1] https://www.reuters.com/article/uk-snb-banknote/cash-crazy-swiss-get-new-1000-swiss-franc-note-idUSKCN1QM1KJ https://www.reuters.com/article/uk-snb-banknote/cash-crazy-s...