6 ms·

I understand why you would want to set interest rates negative if your central bank is going to buy up all that debt, but as an individual or institutional inve

I understand why you would want to set interest rates negative if your central bank is going to buy up all that debt, but as an individual or institutional investor why would you ever want to hold something with negative interest instead of cash? Why is there even a market for a bond with negative interest rates at all, since compared to a $X bond with negative interest, $X in currency seemingly carries less risk, more liquidity, and a higher rate of return?

toomuchtodo 7y ago
> but as an individual or institutional investor why would you ever want to hold something with negative interest instead of cash? There are no effective ways besides these bonds to hold tens or hundreds of millions of dollars as cash, even if you hire a warehouse, security, and store pallets of fiat (which has been attempted). You are paying a premium for principal safety. You either make this choice voluntarily as an asset manager, or because you are required by regulation or other means to hold a percentage of your portfolio in this asset class.
- somebodythere 7y ago
  Also cash can be made illegal.
  - deleted 7y ago
    [deleted]
  - rubbingalcohol 7y ago
    Technically but likely not functionally.
    - kingo55 7y ago
      True, but they can always impose greater restrictions such as how much you can spend with cash. Cash transaction limits have been decreasing for some time. https://wolfstreet.com/2017/01/28/europe-limits-on-cash-transactions-war-on-cash/ https://wolfstreet.com/2017/01/28/europe-limits-on-cash-tran...
- opportune 7y ago
  I'm clearly no expert but banks seem to be able to do this somehow, no?
  - wcoenen 7y ago
    Banks are special because they can deposit money with the central bank. The central bank won't disappear, and like most money it's just numbers in a database (nothing "backing" them) so there's no risk associated with these deposits. But in the EU, the deposit rate set by the ECB is -0.40%. So that would explain why EU banks would be willing to buy negative yielding bonds instead to hold in reserve, as long as the yields on those are less negative. But then the yield on German bunds is actually even lower, hitting -0.60% recently, so it's not just that.
- dfischer 7y ago
  The latter is the biggest reason. Institutional funds are required to purchase these “low risk” items and many would argue is artificial demand so it ends up doing more harm than good.
- samsonradu 7y ago
  This, coupled with the pure speculation that before the bonds mature there will be a 'bigger investor' paying more (pushing the yield lower and the value higher).
  - deleted 7y ago
    [deleted]
wefarrell 7y ago
It makes no sense for an individual, since you can keep your money in an FDIC insured account and earn a positive interest rate. Institutions don't have that luxury - the government doesn't insure large amounts of cash. If they keep it in a bank and the bank goes under, they lose their money. So they keep their money in national governments, which are far safer than banks.
- quantguy11959 7y ago
  It’s positive for now, in Europe the deposit accounts are negative as well for the most part.
  - nawitus 7y ago
    They're positive for regular customers, but negative for large organizations.
  - rocqua 7y ago
    I still get 0,05٪ interest! That is technically positive!
    - quantguy11959 7y ago
      What’s 0.05% minus 1.5% inflation ? Negative
- basementcat 7y ago
  There’s no requirement that FDIC accounts must pay an interest rate above 0%. It is perfectly legal to charge fees to fund the continued operation of the bank.
- gst 7y ago
  > Institutions don't have that luxury - the government doesn't insure large amounts of cash. If they keep it in a bank and the bank goes under, they lose their money. So they keep their money in national governments, which are far safer than banks. Due to the low interest rates German insurance companies are already considering to store cash in their own vaults instead of buying bonds: https://translate.google.com/translate?hl=&sl=de&tl=en&u=https%3A%2F%2Fwww.faz.net%2Faktuell%2Ffinanzen%2Fversicherungen-wollen-geld-in-tresoren-bunkern-16328231.html https://translate.google.com/translate?hl=&sl=de&tl=en&u=htt... Slightly negative interest rates work because physically storing cash is going to be more expensive than buying bonds (especially if you factor in costs for security, insurance, etc.). But if interest rates decreases further it's soon going to be cheaper to store cash, which is going to create a lower bound for the interest rate (assuming the government doesn't prohibit storing large amounts of cash).
pbk1 7y ago
If I expected interest rates to go even more negative, buying a negative yielding bond in anticipation of a capital gain is a rational trade. Also banks and certain investors are mandated to purchase debt with certain ratings - in the absence of positive-yielding appropriately rated bonds they have no choice but to accept the negative yield.
- programmertote 7y ago
  Could you elaborate on this a bit more? How could one gain anything from buying negative yielding bond?
  - rossriley 7y ago
    Because the bond pays out at the end of the term, but you can sell it at any point of the term for whatever the market price is. So for example let's say you bought a -0.1% yield, but newly issued bonds are now only offering a -0.5% yield you can now actually sell your bonds paying out -0.1% at a profit, since even if they paid you a 3.5% premium on the price you paid, it would still be more attractive than the rate on offer for new bonds.
    - pbk1 7y ago
      Piggy backing off of this followup, bond prices move inversely with yields. Ceteris paribus, a -0.5% yielding bond commands a higher price than a -0.1% yielding bond. Bonds are quoted in yields but traded on a dollar price (typically as a percentage of par) hence the capital gain I implied above being realized with the higher price should yields/rates fall further.
DennisP 7y ago
Because if interest rates drop even lower, you can get capital gains on your bonds, especially if there's a lot of time left before they mature. https://portfoliocharts.com/2019/05/27/high-profits-at-low-rates-the-benefits-of-bond-convexity/ https://portfoliocharts.com/2019/05/27/high-profits-at-low-r...
- AnimalMuppet 7y ago
  If. I have a hard time seeing interest rates continuing to drop, however. (On the other hand, I never thought I'd see them this low. But they can't keep going lower forever... can they?)
  - caseysoftware 7y ago
    It depends on how badly you want to drive "growth". If you have $1000 today and can either spend it now or put it in the bank and withdraw $999 a year from now, what would you do? I suspect some would spend it now. But what if that number goes down to $990 or $975? More and more people will be willing to spend it now instead of savings therefore "growing" the economy now.
    - caseysoftware 7y ago
      Denmark has introduced a negative interest rate mortgage. That's an interesting one because if you borrow $200k today and only owe $195k in 10 years, what happens? First, since you don't have to make payments, you can't default. If you can't default, why bother with qualification? If you don't have to qualify, is there an upper limit to how much you can/should borrow? If there's no upper limit and you never have to pay, it doesn't matter whether the seller charges $100k or $1M or $10M.. it demonstrates that the entire system is entirely made up.
      - AnimalMuppet 7y ago
        No, I'm pretty sure there's going to be an upper limit, and it's going to be somewhat less than 100% of the purchase price. It's not carte blanche to borrow unlimited amounts of money. In fact, I would be surprised if you could get away with no payments (a balloon payment loan, as it were). I would be rather shocked if they were offering such loans. Absent data that they are actually offering such loans (balloon and/or untethered to the price of the property), I find your conclusions unwarranted.
darawk 7y ago
When you deposit your money at the bank, the bank pays you an interest rate. Normally that rate is positive. They pay you that interest rate because they are investing your money somewhere (often in mortgages, which pay them an interest rate). However, sometimes they have more money than their investment prospects can handle. Normally under those circumstances, they would buy treasuries from the federal reserve, which return the "risk-free rate". They always want to invest their money in things that return more than the risk-free rate, but sometimes they can't find enough stuff to invest in that they think will have a better return. In those cases, they're forced to buy treasuries. Now, if the risk-free rate is negative, you might reasonably ask: Why doesn't the bank just keep cash? And the answer to that is that they're legally prevented from doing so. Banks have to maintain their capital reserves at the Fed, and the Fed pays them the "federal funds rate" on those reserves. So if they can't lend out the capital, they have to keep it with the Fed, where it earns whatever rate the Fed chooses to give them.
- krastanov 7y ago
  This is fascinating news to me! Could you elaborate on how (legislatively) the banks are required to keep their reserves with the Fed? What would be a good source to read more? How does what you said mesh with the notion that keeping cash might be riskier / more cumbersome than investing in the "risk-free" treasury bonds?
  - lbotos 7y ago
    Not GP, but at someone else on HN's suggestion, I've been following Khan Academy's banking course: https://www.khanacademy.org/economics-finance-domain/core-finance/money-and-banking https://www.khanacademy.org/economics-finance-domain/core-fi...
  - darawk 7y ago
    Sure: https://en.wikipedia.org/wiki/Excess_reserves https://en.wikipedia.org/wiki/Excess_reserves Banks are required by law to keep a portion of their assets on deposit in reserve. So if a bank has say, 1 billion in deposits, they might be required to maintain a balance with the Fed of 100 million. What I think you're asking though is "why don't they just not keep the cash at the federal reserve". And the answer is that that's just not a thing you can do. Your bank maintains an account with the Fed - that's how it actually "stores" money. It can also physically store cash, but that comes with carrying costs (protecting it, etc.). Those carrying costs are one form of a negative interest rate. At the end of the day, someone is storing the money somewhere. And the root-level money storer in the economy is the Fed. If the Fed wants to charge you 0.5%/year to store your money, what are your alternatives? You could keep physical cash. But then you have to protect it. You could invest in other assets, like stocks/bonds/mortgages, but those have risks. If you can't find any investments you like, and you don't want to physically store the cash, you don't really have any other choice.
simplecomplex 7y ago
There’s a market because a -1% rate is a better return on capital than -2%. You’re assuming people are choosing negative rates over positive. Even if bonds are negative investors may have no choice, it’s a better rate than letting the cash sit there.
gpm 7y ago
I would argue that the reason is simply that physically holding cash has a negative interest rate since you have to pay for a place to keep it, people to protect it, and accept the risk that it gets damaged, lost, or stolen. This applies whether you are a person with a wallet/mattress, or a bank with a high security vault.
- ErikAugust 7y ago
  Yes, and due to inflation.
  - gruez 7y ago
    >and due to inflation. That happens regardless of the interest rate and affects both cash and bond/treasuries.
gnopgnip 7y ago
It is about risk adjusted return. There is risk and costs associated with stuffing your money in a mattress, or keeping it in other kinds of accounts. Really it is the same as asking why people would buy a treasury bond instead of a CD, or junk bond that pays more in interest.
internet_user 7y ago
currency would be on deposit at some bank, so it would essentially be a claim on that bank's balance sheet. Bonds are claims on sovereigns with a printing press. What has a lower chance of default?

toomuchtodo 7y ago

> but as an individual or institutional investor why would you ever want to hold something with negative interest instead of cash? There are no effective ways besides these bonds to hold tens or hundreds of millions of dollars as cash, even if you hire a warehouse, security, and store pallets of fiat (which has been attempted). You are paying a premium for principal safety. You either make this choice voluntarily as an asset manager, or because you are required by regulation or other means to hold a percentage of your portfolio in this asset class.

somebodythere 7y ago
Also cash can be made illegal.
- deleted 7y ago
  [deleted]
- rubbingalcohol 7y ago
  Technically but likely not functionally.
  - kingo55 7y ago
    True, but they can always impose greater restrictions such as how much you can spend with cash. Cash transaction limits have been decreasing for some time. https://wolfstreet.com/2017/01/28/europe-limits-on-cash-transactions-war-on-cash/ https://wolfstreet.com/2017/01/28/europe-limits-on-cash-tran...
opportune 7y ago
I'm clearly no expert but banks seem to be able to do this somehow, no?
- wcoenen 7y ago
  Banks are special because they can deposit money with the central bank. The central bank won't disappear, and like most money it's just numbers in a database (nothing "backing" them) so there's no risk associated with these deposits. But in the EU, the deposit rate set by the ECB is -0.40%. So that would explain why EU banks would be willing to buy negative yielding bonds instead to hold in reserve, as long as the yields on those are less negative. But then the yield on German bunds is actually even lower, hitting -0.60% recently, so it's not just that.
dfischer 7y ago
The latter is the biggest reason. Institutional funds are required to purchase these “low risk” items and many would argue is artificial demand so it ends up doing more harm than good.
samsonradu 7y ago
This, coupled with the pure speculation that before the bonds mature there will be a 'bigger investor' paying more (pushing the yield lower and the value higher).
- deleted 7y ago
  [deleted]

wefarrell 7y ago

It makes no sense for an individual, since you can keep your money in an FDIC insured account and earn a positive interest rate. Institutions don't have that luxury - the government doesn't insure large amounts of cash. If they keep it in a bank and the bank goes under, they lose their money. So they keep their money in national governments, which are far safer than banks.

quantguy11959 7y ago
It’s positive for now, in Europe the deposit accounts are negative as well for the most part.
- nawitus 7y ago
  They're positive for regular customers, but negative for large organizations.
- rocqua 7y ago
  I still get 0,05٪ interest! That is technically positive!
  - quantguy11959 7y ago
    What’s 0.05% minus 1.5% inflation ? Negative
basementcat 7y ago
There’s no requirement that FDIC accounts must pay an interest rate above 0%. It is perfectly legal to charge fees to fund the continued operation of the bank.
gst 7y ago
> Institutions don't have that luxury - the government doesn't insure large amounts of cash. If they keep it in a bank and the bank goes under, they lose their money. So they keep their money in national governments, which are far safer than banks. Due to the low interest rates German insurance companies are already considering to store cash in their own vaults instead of buying bonds: https://translate.google.com/translate?hl=&sl=de&tl=en&u=https%3A%2F%2Fwww.faz.net%2Faktuell%2Ffinanzen%2Fversicherungen-wollen-geld-in-tresoren-bunkern-16328231.html https://translate.google.com/translate?hl=&sl=de&tl=en&u=htt... Slightly negative interest rates work because physically storing cash is going to be more expensive than buying bonds (especially if you factor in costs for security, insurance, etc.). But if interest rates decreases further it's soon going to be cheaper to store cash, which is going to create a lower bound for the interest rate (assuming the government doesn't prohibit storing large amounts of cash).

pbk1 7y ago

If I expected interest rates to go even more negative, buying a negative yielding bond in anticipation of a capital gain is a rational trade. Also banks and certain investors are mandated to purchase debt with certain ratings - in the absence of positive-yielding appropriately rated bonds they have no choice but to accept the negative yield.

programmertote 7y ago
Could you elaborate on this a bit more? How could one gain anything from buying negative yielding bond?
- rossriley 7y ago
  Because the bond pays out at the end of the term, but you can sell it at any point of the term for whatever the market price is. So for example let's say you bought a -0.1% yield, but newly issued bonds are now only offering a -0.5% yield you can now actually sell your bonds paying out -0.1% at a profit, since even if they paid you a 3.5% premium on the price you paid, it would still be more attractive than the rate on offer for new bonds.
  - pbk1 7y ago
    Piggy backing off of this followup, bond prices move inversely with yields. Ceteris paribus, a -0.5% yielding bond commands a higher price than a -0.1% yielding bond. Bonds are quoted in yields but traded on a dollar price (typically as a percentage of par) hence the capital gain I implied above being realized with the higher price should yields/rates fall further.

DennisP 7y ago

Because if interest rates drop even lower, you can get capital gains on your bonds, especially if there's a lot of time left before they mature. https://portfoliocharts.com/2019/05/27/high-profits-at-low-rates-the-benefits-of-bond-convexity/ https://portfoliocharts.com/2019/05/27/high-profits-at-low-r...

AnimalMuppet 7y ago
If. I have a hard time seeing interest rates continuing to drop, however. (On the other hand, I never thought I'd see them this low. But they can't keep going lower forever... can they?)
- caseysoftware 7y ago
  It depends on how badly you want to drive "growth". If you have $1000 today and can either spend it now or put it in the bank and withdraw $999 a year from now, what would you do? I suspect some would spend it now. But what if that number goes down to $990 or $975? More and more people will be willing to spend it now instead of savings therefore "growing" the economy now.
  - caseysoftware 7y ago
    Denmark has introduced a negative interest rate mortgage. That's an interesting one because if you borrow $200k today and only owe $195k in 10 years, what happens? First, since you don't have to make payments, you can't default. If you can't default, why bother with qualification? If you don't have to qualify, is there an upper limit to how much you can/should borrow? If there's no upper limit and you never have to pay, it doesn't matter whether the seller charges $100k or $1M or $10M.. it demonstrates that the entire system is entirely made up.
    - AnimalMuppet 7y ago
      No, I'm pretty sure there's going to be an upper limit, and it's going to be somewhat less than 100% of the purchase price. It's not carte blanche to borrow unlimited amounts of money. In fact, I would be surprised if you could get away with no payments (a balloon payment loan, as it were). I would be rather shocked if they were offering such loans. Absent data that they are actually offering such loans (balloon and/or untethered to the price of the property), I find your conclusions unwarranted.

darawk 7y ago

When you deposit your money at the bank, the bank pays you an interest rate. Normally that rate is positive. They pay you that interest rate because they are investing your money somewhere (often in mortgages, which pay them an interest rate). However, sometimes they have more money than their investment prospects can handle. Normally under those circumstances, they would buy treasuries from the federal reserve, which return the "risk-free rate". They always want to invest their money in things that return more than the risk-free rate, but sometimes they can't find enough stuff to invest in that they think will have a better return. In those cases, they're forced to buy treasuries. Now, if the risk-free rate is negative, you might reasonably ask: Why doesn't the bank just keep cash? And the answer to that is that they're legally prevented from doing so. Banks have to maintain their capital reserves at the Fed, and the Fed pays them the "federal funds rate" on those reserves. So if they can't lend out the capital, they have to keep it with the Fed, where it earns whatever rate the Fed chooses to give them.

krastanov 7y ago
This is fascinating news to me! Could you elaborate on how (legislatively) the banks are required to keep their reserves with the Fed? What would be a good source to read more? How does what you said mesh with the notion that keeping cash might be riskier / more cumbersome than investing in the "risk-free" treasury bonds?
- lbotos 7y ago
  Not GP, but at someone else on HN's suggestion, I've been following Khan Academy's banking course: https://www.khanacademy.org/economics-finance-domain/core-finance/money-and-banking https://www.khanacademy.org/economics-finance-domain/core-fi...
- darawk 7y ago
  Sure: https://en.wikipedia.org/wiki/Excess_reserves https://en.wikipedia.org/wiki/Excess_reserves Banks are required by law to keep a portion of their assets on deposit in reserve. So if a bank has say, 1 billion in deposits, they might be required to maintain a balance with the Fed of 100 million. What I think you're asking though is "why don't they just not keep the cash at the federal reserve". And the answer is that that's just not a thing you can do. Your bank maintains an account with the Fed - that's how it actually "stores" money. It can also physically store cash, but that comes with carrying costs (protecting it, etc.). Those carrying costs are one form of a negative interest rate. At the end of the day, someone is storing the money somewhere. And the root-level money storer in the economy is the Fed. If the Fed wants to charge you 0.5%/year to store your money, what are your alternatives? You could keep physical cash. But then you have to protect it. You could invest in other assets, like stocks/bonds/mortgages, but those have risks. If you can't find any investments you like, and you don't want to physically store the cash, you don't really have any other choice.

simplecomplex 7y ago

There’s a market because a -1% rate is a better return on capital than -2%. You’re assuming people are choosing negative rates over positive. Even if bonds are negative investors may have no choice, it’s a better rate than letting the cash sit there.

gpm 7y ago

I would argue that the reason is simply that physically holding cash has a negative interest rate since you have to pay for a place to keep it, people to protect it, and accept the risk that it gets damaged, lost, or stolen. This applies whether you are a person with a wallet/mattress, or a bank with a high security vault.

ErikAugust 7y ago
Yes, and due to inflation.
- gruez 7y ago
  >and due to inflation. That happens regardless of the interest rate and affects both cash and bond/treasuries.

gnopgnip 7y ago

It is about risk adjusted return. There is risk and costs associated with stuffing your money in a mattress, or keeping it in other kinds of accounts. Really it is the same as asking why people would buy a treasury bond instead of a CD, or junk bond that pays more in interest.

internet_user 7y ago

currency would be on deposit at some bank, so it would essentially be a claim on that bank's balance sheet. Bonds are claims on sovereigns with a printing press. What has a lower chance of default?