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Germany for First Time Sells 30-Year Bonds Offering Negative Yields

218 points by yasp 7y ago

apo 7y ago
For those wondering why anyone would buy such a thing, consider: - Many financial institutions are required to hold a certain percent of portfolio in safe assets. German bunds are among the safest in the world. - A holder of a bond earns a capital gain (bond goes up in price) when interest rates fall. In that sense, zero is no limit at all because there can always be a buyer willing to accept an even lower (more negative) yield. - Bond investors are well-aware of the two points above. When they sense that interest rates and/or inflation are headed lower, they know they can profit by buying, regardless of yield. - Anticipated rate of inflation matters a lot because investors seeking return through yield focus on real interest rates (nominal rate - inflation). Inflation can be negative as well (deflation). If inflation is lower (more negative) than the bond's nominal return, that's a real positive yield. And that positive yield is locked in for the term of the bond, which in the case of the story is 30 years. - The European Central Bank has repeatedly signaled its belief that zero is no barrier and that negative yields will be tolerated indefinitely. The ECB stands ready for quantitative easing (QE), in which the central bank buys bonds with money it creates from thin air. Investors know this and this compounds the incentive to pile on and buy bonds to enjoy the capital gains (and real returns if the investor believes that deflation is inevitable). It's likely that all these factors combine to create the current environment. How long all of this can continue is anybody's guess because the situation is without precedent. It's as if the financial crisis of 2008 was never resolved - just papered over through massive central bank purchases of treasuries and stocks (Japan's central bank owns a major fraction of the value of the Japanese stock market at this point).
- whatok 7y ago
  Good post that covers nearly everything. The only thing I would add to this is that the ECB's deposit rate of -0.40% is the only thing that has enabled all of this.
  - AdrianB1 7y ago
    Actually the ability of the ECB to print money out of nothing is the main enabler.
    - arez 7y ago
      isn't that the it's job? It hands out loans for money it doesn't have but can steer the market with the interest rates
    - whatok 7y ago
      The ECB printing money is a factor in stabilizing rates but it in itself does not create conditions where governments are able to borrow for 30 years at negative rates. For example, if the deposit rate was at 3.00% instead of -0.40%, governments would not be able to issue at negative yields; QE or no QE. Additionally, the ECB stopped net QE purchases at the beginning of the year and negative rates are still a thing.
  - wcoenen 7y ago
    This would explain negative bond rates down to -0.40%. Because if you need to park a very large amount of euros safely, banks will start to apply that rate to your deposits so it's better to get any rate that is less negative. But curiously 10y german bund yields have recently hit -0.70%, and a couple other EU countries (France, Netherlands, Belgium) have also dipped below -0.40%. So it must be more than the negative deposit rate. It's also the QE program which buys bonds (though it's on hold since the start of the year), and the expectation of lower deposit rates, and the expectation of more QE.
    - whatok 7y ago
      I agree with all of this and probably could have phrased my original post better. My main point is that none of this is really possible without ECB rates being set where they are. Successful monetary policy requires multiple tools to be utilized and the deposit rate is the main tool that anchors everything else. QE in itself does not mean rates are going to be lower. You need central bank rates to also be low in order to have lower government rates. Rates didn't suddenly skyrocket after the ECB announced the end of QE.
- logicallee 7y ago
  >- Many financial institutions are required to hold a certain percent of portfolio in safe assets. German bunds are among the safest in the world. Can you explain how this can possibly beat cash? If I say to you "I'll let you pay me ten cents to hold onto your $100 bill for a while, and give you a paper showing the obligation to repay your $100" (the meaning of a negative yield bond), how can the offer to let you pay ten cents to let me hold your $100 possibly be less risky than just holding the $100? Why would a bond with a negative yield ever be a safer asset than just holding the cash?
  - deleted 7y ago
    [deleted]
  - blawson 7y ago
    Maybe at certain sums much larger than individual depositors concern themselves with, you can't just "hold the cash". Like banks might say there is no way we want your $10 billion in cash to look after. Either invest it yourself or pay us to invest it for you.
    - josefx 7y ago
      You really don't want $10 billion in a bank. Laws mostly guarantee a few hundred thousand per account holder if the bank itself has financial issues. You would have to spread that amount over quite a few banks if you wanted it secured.
  - auntienomen 7y ago
    The world is different when you're dealing with really large amounts of cash. You can't just store it yourself; your mattress isn't big enough. And if you ask a bank to store it for you, the bank will charge you for the service. (Banks that work in this line of business are known as 'custodian banks'.) Consequently, the effective interest rate on cash for large amounts of cash can be negative.
  - whatok 7y ago
    You can argue safety (bonds you have sovereign default risk vs cash will have bank credit risk) but your math is not incorporating how a transaction in this case would actually take place. It's not as simple as just holding onto $100. You have a deposit rate of -0.40% at the ECB. So instead of -0.40%, you settle for -0.14% which is what these newly issued Bunds are yielding.
- shpongled 7y ago
  Also, you can sell or buy bonds at any time - you're not locked in for 30 years. I think this is a crucial point many don't understand
- simonebrunozzi 7y ago
  Great comment, however: > the central bank buys bonds with money it creates from thin air QE generates inflation in the long run, which would by definition make these bonds less valuable over time.
- solatic 7y ago
  > - Many financial institutions are required to hold a certain percent of portfolio in safe assets. In practice this is turning into unnatural demand guaranteed by the law, which goes against free markets and will eventually implode upon itself. If you force the market to buy a certain product regardless of quality, then the underlying quality of that product will erode (as there is no longer an incentive to provide quality and quality implies cost), and the market will evaporate as stakeholders disappear and move to other markets which do assure real quality. That there was natural demand for such products in the past, and indeed that natural demand may coincide with unnatural demand in the present, is not a guarantor for demand levels staying natural in the future. In context, this creates underlying pressure for investors to divest from Euro holdings. It's likely that investors are currently sticking with the Euro because they have few other avenues for escape, but this is not likely to hold - whether due to Brexit/Euroskepticism or some other external crisis which changes the playing field.
  - landivar2 7y ago
    When you have a central bank that can control rates, no alternative money, and the bank can set rates negative, the equilibrium is for the government to own almost all assets. I'm not kidding. You will end up with communism, only via government regulation of rates, unless something breaks this up.
    - kthejoker2 7y ago
      If our capital markets are so unproductive that having the government own the assets is considered a net economic gain, we'll need all the communism we can get. The central bank does not "control" rates, they respond to the market signaling where rates should be.
- dvfjsdhgfv 7y ago
  > - Anticipated rate of inflation matters a lot because investors seeking return through yield focus on real interest rates (nominal rate - inflation). Inflation can be negative as well (deflation). If inflation is lower (more negative) than the bond's nominal return, that's a real positive yield. And that positive yield is locked in for the term of the bond, which in the case of the story is 30 years. But for this and the other reasons you mention, wouldn't cash be in any case better than the bonds?
TheSoftwareGuy 7y ago
I feel like I still don't understand negative yields, despite really trying to. Negative yields means that I put in $X (or euro/whatever germany is using) and I later am guarenteed no more than $Y out of the exchange, where Y < X. I am literally guaranteed to lose money. I could just hold on to my money, "keep it under my mattress" and still make a better ROI than bonds with negative yields. Why would anybody buy these bonds?
- andreilys 7y ago
  From what I understand it’s moreso for institutional investors that have lots of capital they need to park somewhere. Making the bet that the gov will be around longer the bank But for retail investors who can store their money in a FDIC insured savings account it’s not clear why they would buy negative yield bonds.
  - 0xffff2 7y ago
    So for an institutional investor, a negative yield bond is essentially a hedge against bank failure?
    - andreilys 7y ago
      Yea that’s a good way to think about it
      - md224 7y ago
        Does that mean a negative yield indicates a loss of trust in banks? That institutional investors are so desperate to avoid relying on banks that they're willing to take a loss on gov't bonds?
        mdemare 7y ago
        No, institutional investors never put vast sums of money in banks, regardless of the yield.
fourstar 7y ago
Those of you (US) with large stock/cash positions: what are you doing to weather the (inevitable) storm? Feels like we’re in the doom and gloom media phase. I suspect lots of people will start forgetting within the next 6 months in which the stock market will go sideways, until the next catalyst which is the US election cycle.
- my_username_is_ 7y ago
  >what are you doing to weather the (inevitable) storm? Stay invested in equities. Keep some cash on hand as an emergency fund in case you lose your job, but just don't sell your stocks when the market is down. Stay diversified and stay in the market.
  - mooreds 7y ago
    > Stay diversified and stay in the market. Agree 100%. Always worth noting that you should have an asset allocation based on your risk profile. If you need the money to pay for your kids college and it is less than 5 years away, don't have it in stocks! Beyond that, equity allocation makes sense. You want to walk the line between not being able to sleep at night because the market is cratering and not being able to sleep at night in 30 years because you don't have enough money saved to retire the way you want to. Disclaimer: I like this stuff, but I am not a financial advisor.
- rifung 7y ago
  > Those of you (US) with large stock/cash positions: what are you doing to weather the (inevitable) storm I follow the traditional advice of doing nothing and not trying to time the market.
  - twoheadedboy 7y ago
    Yeah I get that. What about for people like me who are trying to enter the market? I'm wondering if it's worth it to wait and see, or if I should just not worry too much and invest now anyway.
yasp 7y ago
If central banks weren't setting the price of credit by fiat, what would a "market" risk free rate be? Have any economists tried to answer this question? Edit: not sure why I'm being downvoted for this...?
- satiani 7y ago
  I think issuing fiat money and setting price of credit by fiat are two faces of the same coin. I think the way real interest rates behaved under the "Gold Standard" would be close to an answer to your question.
  - yasp 7y ago
    Not sure, but to your point even during the gold standard there was an element of fiat because the government mandated a convertibility with respect to gold.
- dredmorbius 7y ago
  A fair question, and there's an argument that's been made (though I'm unable to recall precisely where I ran across it, possibly in a New Books in Economics podcast) that while interest rates might once have been considered exogenous (market-determined) they are now endogenous (central-bank determined). Which would mean that interest rates are (more or less) what CBs want them to be, at least within the bounds defined by inflation. Which presumably they want to be kept low presently.
  - yasp 7y ago
    Are you maybe thinking of what MMTers e.g. Warren Mosler assert? (E.g., Mosler calling for 0% interest rates, always.) If you can think of source, please let me know. Sounds interesting. Edit: It also sounds fallacious to me. Interest rates are central-bank determined because the central bank chooses to determine them. In the absence of a central bank controlling rates, there undoubtedly would still be interest rates. There ostensibly also still would be risk free rates. In some hypothetical parallel Earth, the Fed might instead choose to control the price of some other commodity, like oil. That doesn't mean that the price of oil would be "endogenous" and therefore that there's no market price. Just that the Fed had chosen to suppress that market price. Thus, as far as I can tell, it still makes sense to ask the question "what would be the market risk free rate?"
gzu 7y ago
I’m starting to entertain the idea of a massive bubble in bonds. Is inflation really never going to show again? I can’t understand why anyone would want to hold a fiat currency for 30 years for no return. Is it due to portfolio theory where the assumption is stocks and bonds yields have inverse correlation and the way to manage risk is to have a correct ratio? Due to global QE there is too much money floating without enough to invest. What’s the alternative to equities and/or bonds
- RockIslandLine 7y ago
  "Is inflation really never going to show again?" What causes inflation? Inflation is too much money chasing too few goods and services. When populations are growing, you need to expand the money supply to avoid deflation. What happens when populations stop growing?
  - paulpauper 7y ago
    Turkey and other economically weak countries have high pop growth and high inflation and high bond yields, so that is not the answer. it has more to do with flight to safety. Countries that are perceived as economically strong and geopolitically stable have low yields, countries that are weak have high yields ,regardless of pop growth.
- adventured 7y ago
  > Is inflation really never going to show again? In developed economies money is being removed nearly as fast as it's being added, in the form of going into the blackhole of low to negative yielding paper. It's removing a present ~$17 trillion of capital that could otherwise be sloshing around pressing inflation higher. That's an extraordinary amount of money that has largely been rendered non-impacting. There are only a few areas where you see any inflationary pressure in the US, such as in assets like equities and real-estate, due to the Fed rates. In that case you've got people with immense collective free capital pressing aggressively upward on prices (willing to pay a high premium to try to get a return beyond what eg treasuries are offering). It's why Japan can never spark traditional inflation (nor achieve any growth). Their epic pile of low yield debt has sucked a lot of the loose capital out of their economy. It's a giant pile of non-productive, non-active, ineffectual capital. Instead of going toward wage pressure / competition, growth, business formation & loans, VC, productivity investments, R&D, et al. If you could unleash $20-$30 trillion of increasingly low yielding debt back into the US economy, inflation would skyrocket and it would demand far higher rates to control inflationary pressure. It takes several things working in tandem to result in this unusual outcome. Countries outside of the developed world - the first tier, affluent economies - have a near impossible time achieving such low or negative yields, and lack of inflationary pressure.
nostromo 7y ago
This is the real reason the US yield curve looks the way it does. All other developed countries are selling negative or near zero government bonds. This has lead to huge international demand for US 30 year treasuries. https://tradingeconomics.com/bonds https://tradingeconomics.com/bonds US treasuries are giving a greater yield than Italy or Spain for reference. Of course there will be huge demand. Central banks are no longer islands. They are part of the global economy and a part of a market just like any other. The US acting alone to raise interest rates won't work like it did in previous cycles.
- robocat 7y ago
  Alternatively investors holding USD may believe that EUR will strengthen against USD over 30 years by more than: 0.5% + US_30year_treasury_bond_rate + risk_adjustment A negative interest rate is fine for US investors if you think the exchange rate will shift enough in your favour to cover your costs.
  - robocat 7y ago
    Happened before: https://www.bloomberg.com/opinion/articles/2019-08-22/swiss-history-of-negative-interest-rates-is-ugly https://www.bloomberg.com/opinion/articles/2019-08-22/swiss-...
- ThrustVectoring 7y ago
  US and EU bonds are denominated in different currencies, and the cost to hedge the currency risk with a forward contract eliminates the difference in interest rates. In other words, the effect of the US raising interest rates isn't just to put pressure on EU interest rates, but also to put pressure on the expected future exchange rate.
sunseb 7y ago
Do you think it's a good idea to put some savings in gold?
- nostromo 7y ago
  As part of a portfolio you hold for decades? Sure. Otherwise? No. https://en.wikipedia.org/wiki/Modern_portfolio_theory https://en.wikipedia.org/wiki/Modern_portfolio_theory
  - TheHegemon 7y ago
    No, gold has not outperformed even cash in the last 30 years. It is only worth it if you can time it precisely: https://www.macrotrends.net/1333/historical-gold-prices-100-year-chart https://www.macrotrends.net/1333/historical-gold-prices-100-...
    - nostromo 7y ago
      Read and understand the link I posted. The point of holding gold isn't to increase your returns, but to reduce the volatility of a diversified portfolio.
    - icelancer 7y ago
      >> gold has not outperformed even cash in the last 30 years. It is specifically geared to underperform it in markets like this, so it's doing its job.
- deleted 7y ago
  [deleted]
- icelancer 7y ago
  If you have to ask, the answer is almost certainly "no." There are reasons to hold commodities and precious metals like gold/silver, but they are pretty specific and for retail investors usually circle the idea of hedging against your first-party currency.
- rchaud 7y ago
nihilarian 7y ago
This was news about a week ago
thorwasdfasdf 7y ago
I understand that policy makers think that low interest rates will encourage people to put their money into investments like the equities or a business by forcing people out of saving. But, have they ever considered that they may actually be achieving the opposite? Someone who just turned 65 (like aging Europe), really really needs to save in safe assets. Negative yielding bonds don't change that need! So, instead of investing in risky assets, they may simply take the negative yield and save even harder to make up for the negative yield thus reducing spending even further and hurting the economy.
- elcomet 7y ago
  I think that's the point isn't it? To provide extra-safe assets for people who need it.
  - thorwasdfasdf 7y ago
    Their objective is that people won't save the money. They want people to spend the money, the sooner the better, but that goal completely contradicts what a retiree (and aging population) needs/wants to do.
- ThrustVectoring 7y ago
  The extra saving means higher prices for the assets of current retirees, which should end up resulting in them selling assets and spending the extra money.
- imtringued 7y ago
  There is also the risk that injecting additional cash into companies that don't need it further disconnects them from the actual economy. Investors can now make money simply through the appreciation of stocks, housing and dividend payments funded by negative interest mortgages. Since companies no longer need to sell more products, services or participate in the economy the end result is that you are not only not stopping deflation, you are actually mildly increasing it.
- tachyonbeam 7y ago
jnordwick 7y ago
So it is a zero coupon bond sold above par, but this doesn't mean the bank isn't making money off of it. There are a lot of technical reasons that these can be purchased (such as a tax advantaged stutus or a requirement to hold certain duration on a portfolio). I'm an expert on German bond market, but I expect the actual yield to be positive after taking into account other factors (or there being some regulatory reason). Last time I saw an article on a negative yield mortgage, there were tax resons it was actually coming out positive.
- whatok 7y ago
  I'm looking at the bond on Bloomberg right now and it's showing a yield of -0.14% with a price of EUR104.54. All things equal, if you buy this bond right now and hold it to maturity, that will be your yield. This is an after-tax yield. I'm not sure what bank you are referring to in the first sentence. These are bonds issued by the country.
  - jnordwick 7y ago
    Any after tax yield is going to be an estimate. i no longer have access to a bloomberg login, but does it give its methodology? @ 104.54, YTM would be -0.44 not taking other factors into account. There could also be technical reasons such as collateral requirements or other banking/trading requirements. > I'm not sure what bank you are referring to in the first sentence. These are bonds issued by the country. The purchasing institutions, not the issuing. These mostly banks aren't just giving money away, and they don't really have costs associated with carrying base money since they can just ship cash back to the central bank for reserve credit, i assume under most conditions. And the can always go elsewhere in the eurozone for yield, but they seem to need bunds for particular reason. not sure, i just pretty sure they aren't giving money away for no reason. they could even lay off currency risk and go for US Tsy.
jchrisa 7y ago
Slightly OT but I’ve been trying to google this for a while and there are people reading this who will know where I can look: If a government (pretend US if it helps) stopped collecting taxes, and instead funded the budget by printing money every year, who would be the winners and losers compared to the current system? Where can I go to learn more?
- lixtra 7y ago
  Look at the discussion around MMT https://en.m.wikipedia.org/wiki/Modern_Monetary_Theory https://en.m.wikipedia.org/wiki/Modern_Monetary_Theory
- arbitrage 7y ago
  everyone would be losers, because that is insane. see recent history in zimbabwe. the keyword you're looking for is hyperinflation.
  - anon84598 7y ago
    But actually, anyone who held a large amount of debt would benefit since the value of their debt would shrink
- throwaway123156 7y ago
  I suppose it would lead to inflation and as long as the inflation is controlled, that's doable. Effectively, the government is being funded by all dollar holders at that point. It's a wealth tax of sorts imposed on those who hold their wealth in dollars. The idea would be that the government is being funded by the fact that $100 today, is worth only about $90 last year, and that loss in value is what's funding the government.
  - jchrisa 7y ago
    So maybe the poor and middle class would be better off and the rich would foot the bill?
whatok 7y ago
Like most economic and finance topics on this site, there seems to be a lot of people posting opinions/"facts" without really understanding the subject matter. The reason why bonds are trading at negative rates in the EU are the following: * The ECB deposit rate is -0.40%. Everything else is benchmarked against that * The majority of the EU is either currently in a recession or rapidly heading there * Inflation expectations are weak
- deleted 7y ago
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a11yguy 7y ago
Another reason, I've not seen mentioned, is that you think bonds will go even more negative, so you buy now, to avoid having to buy a much more negative rate later.
docker_up 7y ago
Where can I put my money to take advantage of this? Gold? or just US treasuries?
- koolba 7y ago
  Life isn’t that simple as you’d have implicit currency conversion risk.
- danieltillett 7y ago
  Gold miners. With physical gold you have to worry about storage, but gold miners solve this problem. The gold miners have run pretty hard already, but the developers (those building a new gold mine) have not yet moved that much.
  - cududa 7y ago
    Both having gold stored somewhere and gold mines assume in the event of the collapse of civilization they’d leave the assets as is.
    - danieltillett 7y ago
      If there is a collapse of civillzation the last thing anyone is going to be worried about is their investment returns. Gold as an asset class does well in periods of low real interest rates. All signs suggest we are going to be in a low real interest rate environment for sometime. One of the nice things about investing in gold miners over just gold is in trying to find the best ones. There is real alpha in this as not all gold mines and gold miners are equal.
- teh_infallible 7y ago
  Bitcoin
techrich 7y ago
Glad the UK is getting out, this fate will come to the no nations no borders globalists.
deleted 7y ago
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jedberg 7y ago
The best explanation I've heard for negative rates is this: Imagine you have a million dollars worth of cars. If you want to store that in a bank, you'd pay them money to do so. Why? Because the car has no value to the bank. The only thing they can do is store it in the vault, which requires security personnel, space, climate control, etc. Now instead you have a million dollars in cash. In the current environment, where more people want to put money into the bank than take it out, the cash also has no value to the bank. They can't loan it out again because no one wants to borrow that much. So they charge you for storing your money. This is how they make a profit. By slowly taking your balance, since they can't make money loaning it out. A negative interest rate basically means more people want to save money than spend money. When the government offers negative rates, it's because they want people to spend money instead of save it. When a bank does it, it's because more people are putting money in than taking it out.
- duxup 7y ago
  I have some visibility to a tiny community bank started by some folks and then grew into a larger bank over time. They were mostly a consumer bank (consumer banking, small business type loans, etc) with some side banking related activity. Paradoxically (well seemingly so) the best time for them to buy or merge with other small community banks was if there was an area they wanted to be in ... that was doing well economically. That was the time to look around at the local banks that they might want to pickup, or those banks actually came to them. Local small (usually rural / suburban) community banks would find themselves in a bad spot as the locals were doing well financially, paying off loans early, not really borrowing much, and the locals with their extra money started stuffing it into the local bank. Businesses expanded, but they were able to do so with short term or very limited loans. The local small bank found itself flush with cash, and nobody who wanted it (well not nobody but you get it). That was the time for the other bank to swoop in and save them as they could provide a larger regional reach (and some side businesses that benefited from being backed by all that cash) to areas that still wanted that money for loans.
- booleandilemma 7y ago
  Thanks for your explanation, I think it helps me to understand what’s happening a little better. But how can I reconcile what you’ve said with articles like this?: https://www.cnbc.com/2018/03/15/bankrate-65-percent-of-americans-save-little-or-nothing.html https://www.cnbc.com/2018/03/15/bankrate-65-percent-of-ameri...
turbinerneiter 7y ago
The most fascinating thing is here is that the German government still refuses to take this basically free money to invest in infrastructure.
- PunchTornado 7y ago
  useful infrastructure. I see plenty of vanity projects floating around, hate to see Germany implementing some.
- rossdavidh 7y ago
  I'm not saying your point isn't valid, but: https://en.wikipedia.org/wiki/Berlin_Brandenburg_Airport https://en.wikipedia.org/wiki/Berlin_Brandenburg_Airport Not all German infrastructure spending turns out well.
  - turbinerneiter 7y ago
    BER is it's own special case, but the general gist I'm piecing together from media reports is that Germany has a planning problem because there are not enough government workers to plan projects. For example, there is a budget reserved for infrastructure. The poor regions often fail to produce good enough project plans in time. The richer regions have more planners and present additional projects at the end of the year to get the left over money.

218 points by yasp 7y ago

apo 7y ago

For those wondering why anyone would buy such a thing, consider: - Many financial institutions are required to hold a certain percent of portfolio in safe assets. German bunds are among the safest in the world. - A holder of a bond earns a capital gain (bond goes up in price) when interest rates fall. In that sense, zero is no limit at all because there can always be a buyer willing to accept an even lower (more negative) yield. - Bond investors are well-aware of the two points above. When they sense that interest rates and/or inflation are headed lower, they know they can profit by buying, regardless of yield. - Anticipated rate of inflation matters a lot because investors seeking return through yield focus on real interest rates (nominal rate - inflation). Inflation can be negative as well (deflation). If inflation is lower (more negative) than the bond's nominal return, that's a real positive yield. And that positive yield is locked in for the term of the bond, which in the case of the story is 30 years. - The European Central Bank has repeatedly signaled its belief that zero is no barrier and that negative yields will be tolerated indefinitely. The ECB stands ready for quantitative easing (QE), in which the central bank buys bonds with money it creates from thin air. Investors know this and this compounds the incentive to pile on and buy bonds to enjoy the capital gains (and real returns if the investor believes that deflation is inevitable). It's likely that all these factors combine to create the current environment. How long all of this can continue is anybody's guess because the situation is without precedent. It's as if the financial crisis of 2008 was never resolved - just papered over through massive central bank purchases of treasuries and stocks (Japan's central bank owns a major fraction of the value of the Japanese stock market at this point).

whatok 7y ago
Good post that covers nearly everything. The only thing I would add to this is that the ECB's deposit rate of -0.40% is the only thing that has enabled all of this.
- AdrianB1 7y ago
  Actually the ability of the ECB to print money out of nothing is the main enabler.
  - arez 7y ago
    isn't that the it's job? It hands out loans for money it doesn't have but can steer the market with the interest rates
  - whatok 7y ago
    The ECB printing money is a factor in stabilizing rates but it in itself does not create conditions where governments are able to borrow for 30 years at negative rates. For example, if the deposit rate was at 3.00% instead of -0.40%, governments would not be able to issue at negative yields; QE or no QE. Additionally, the ECB stopped net QE purchases at the beginning of the year and negative rates are still a thing.
- wcoenen 7y ago
  This would explain negative bond rates down to -0.40%. Because if you need to park a very large amount of euros safely, banks will start to apply that rate to your deposits so it's better to get any rate that is less negative. But curiously 10y german bund yields have recently hit -0.70%, and a couple other EU countries (France, Netherlands, Belgium) have also dipped below -0.40%. So it must be more than the negative deposit rate. It's also the QE program which buys bonds (though it's on hold since the start of the year), and the expectation of lower deposit rates, and the expectation of more QE.
  - whatok 7y ago
    I agree with all of this and probably could have phrased my original post better. My main point is that none of this is really possible without ECB rates being set where they are. Successful monetary policy requires multiple tools to be utilized and the deposit rate is the main tool that anchors everything else. QE in itself does not mean rates are going to be lower. You need central bank rates to also be low in order to have lower government rates. Rates didn't suddenly skyrocket after the ECB announced the end of QE.
logicallee 7y ago
>- Many financial institutions are required to hold a certain percent of portfolio in safe assets. German bunds are among the safest in the world. Can you explain how this can possibly beat cash? If I say to you "I'll let you pay me ten cents to hold onto your $100 bill for a while, and give you a paper showing the obligation to repay your $100" (the meaning of a negative yield bond), how can the offer to let you pay ten cents to let me hold your $100 possibly be less risky than just holding the $100? Why would a bond with a negative yield ever be a safer asset than just holding the cash?
- deleted 7y ago
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- blawson 7y ago
  Maybe at certain sums much larger than individual depositors concern themselves with, you can't just "hold the cash". Like banks might say there is no way we want your $10 billion in cash to look after. Either invest it yourself or pay us to invest it for you.
  - josefx 7y ago
    You really don't want $10 billion in a bank. Laws mostly guarantee a few hundred thousand per account holder if the bank itself has financial issues. You would have to spread that amount over quite a few banks if you wanted it secured.
- auntienomen 7y ago
  The world is different when you're dealing with really large amounts of cash. You can't just store it yourself; your mattress isn't big enough. And if you ask a bank to store it for you, the bank will charge you for the service. (Banks that work in this line of business are known as 'custodian banks'.) Consequently, the effective interest rate on cash for large amounts of cash can be negative.
- whatok 7y ago
  You can argue safety (bonds you have sovereign default risk vs cash will have bank credit risk) but your math is not incorporating how a transaction in this case would actually take place. It's not as simple as just holding onto $100. You have a deposit rate of -0.40% at the ECB. So instead of -0.40%, you settle for -0.14% which is what these newly issued Bunds are yielding.
shpongled 7y ago
Also, you can sell or buy bonds at any time - you're not locked in for 30 years. I think this is a crucial point many don't understand
simonebrunozzi 7y ago
Great comment, however: > the central bank buys bonds with money it creates from thin air QE generates inflation in the long run, which would by definition make these bonds less valuable over time.
solatic 7y ago
> - Many financial institutions are required to hold a certain percent of portfolio in safe assets. In practice this is turning into unnatural demand guaranteed by the law, which goes against free markets and will eventually implode upon itself. If you force the market to buy a certain product regardless of quality, then the underlying quality of that product will erode (as there is no longer an incentive to provide quality and quality implies cost), and the market will evaporate as stakeholders disappear and move to other markets which do assure real quality. That there was natural demand for such products in the past, and indeed that natural demand may coincide with unnatural demand in the present, is not a guarantor for demand levels staying natural in the future. In context, this creates underlying pressure for investors to divest from Euro holdings. It's likely that investors are currently sticking with the Euro because they have few other avenues for escape, but this is not likely to hold - whether due to Brexit/Euroskepticism or some other external crisis which changes the playing field.
- landivar2 7y ago
  When you have a central bank that can control rates, no alternative money, and the bank can set rates negative, the equilibrium is for the government to own almost all assets. I'm not kidding. You will end up with communism, only via government regulation of rates, unless something breaks this up.
  - kthejoker2 7y ago
    If our capital markets are so unproductive that having the government own the assets is considered a net economic gain, we'll need all the communism we can get. The central bank does not "control" rates, they respond to the market signaling where rates should be.
dvfjsdhgfv 7y ago
> - Anticipated rate of inflation matters a lot because investors seeking return through yield focus on real interest rates (nominal rate - inflation). Inflation can be negative as well (deflation). If inflation is lower (more negative) than the bond's nominal return, that's a real positive yield. And that positive yield is locked in for the term of the bond, which in the case of the story is 30 years. But for this and the other reasons you mention, wouldn't cash be in any case better than the bonds?

TheSoftwareGuy 7y ago

I feel like I still don't understand negative yields, despite really trying to. Negative yields means that I put in $X (or euro/whatever germany is using) and I later am guarenteed no more than $Y out of the exchange, where Y < X. I am literally guaranteed to lose money. I could just hold on to my money, "keep it under my mattress" and still make a better ROI than bonds with negative yields. Why would anybody buy these bonds?

andreilys 7y ago
From what I understand it’s moreso for institutional investors that have lots of capital they need to park somewhere. Making the bet that the gov will be around longer the bank But for retail investors who can store their money in a FDIC insured savings account it’s not clear why they would buy negative yield bonds.
- 0xffff2 7y ago
  So for an institutional investor, a negative yield bond is essentially a hedge against bank failure?
  - andreilys 7y ago
    Yea that’s a good way to think about it
    - md224 7y ago
      Does that mean a negative yield indicates a loss of trust in banks? That institutional investors are so desperate to avoid relying on banks that they're willing to take a loss on gov't bonds?
      - mdemare 7y ago
        No, institutional investors never put vast sums of money in banks, regardless of the yield.

fourstar 7y ago

Those of you (US) with large stock/cash positions: what are you doing to weather the (inevitable) storm? Feels like we’re in the doom and gloom media phase. I suspect lots of people will start forgetting within the next 6 months in which the stock market will go sideways, until the next catalyst which is the US election cycle.

my_username_is_ 7y ago
>what are you doing to weather the (inevitable) storm? Stay invested in equities. Keep some cash on hand as an emergency fund in case you lose your job, but just don't sell your stocks when the market is down. Stay diversified and stay in the market.
- mooreds 7y ago
  > Stay diversified and stay in the market. Agree 100%. Always worth noting that you should have an asset allocation based on your risk profile. If you need the money to pay for your kids college and it is less than 5 years away, don't have it in stocks! Beyond that, equity allocation makes sense. You want to walk the line between not being able to sleep at night because the market is cratering and not being able to sleep at night in 30 years because you don't have enough money saved to retire the way you want to. Disclaimer: I like this stuff, but I am not a financial advisor.
rifung 7y ago
> Those of you (US) with large stock/cash positions: what are you doing to weather the (inevitable) storm I follow the traditional advice of doing nothing and not trying to time the market.
- twoheadedboy 7y ago
  Yeah I get that. What about for people like me who are trying to enter the market? I'm wondering if it's worth it to wait and see, or if I should just not worry too much and invest now anyway.

yasp 7y ago

If central banks weren't setting the price of credit by fiat, what would a "market" risk free rate be? Have any economists tried to answer this question? Edit: not sure why I'm being downvoted for this...?

satiani 7y ago
I think issuing fiat money and setting price of credit by fiat are two faces of the same coin. I think the way real interest rates behaved under the "Gold Standard" would be close to an answer to your question.
- yasp 7y ago
  Not sure, but to your point even during the gold standard there was an element of fiat because the government mandated a convertibility with respect to gold.
dredmorbius 7y ago
A fair question, and there's an argument that's been made (though I'm unable to recall precisely where I ran across it, possibly in a New Books in Economics podcast) that while interest rates might once have been considered exogenous (market-determined) they are now endogenous (central-bank determined). Which would mean that interest rates are (more or less) what CBs want them to be, at least within the bounds defined by inflation. Which presumably they want to be kept low presently.
- yasp 7y ago
  Are you maybe thinking of what MMTers e.g. Warren Mosler assert? (E.g., Mosler calling for 0% interest rates, always.) If you can think of source, please let me know. Sounds interesting. Edit: It also sounds fallacious to me. Interest rates are central-bank determined because the central bank chooses to determine them. In the absence of a central bank controlling rates, there undoubtedly would still be interest rates. There ostensibly also still would be risk free rates. In some hypothetical parallel Earth, the Fed might instead choose to control the price of some other commodity, like oil. That doesn't mean that the price of oil would be "endogenous" and therefore that there's no market price. Just that the Fed had chosen to suppress that market price. Thus, as far as I can tell, it still makes sense to ask the question "what would be the market risk free rate?"

gzu 7y ago

I’m starting to entertain the idea of a massive bubble in bonds. Is inflation really never going to show again? I can’t understand why anyone would want to hold a fiat currency for 30 years for no return. Is it due to portfolio theory where the assumption is stocks and bonds yields have inverse correlation and the way to manage risk is to have a correct ratio? Due to global QE there is too much money floating without enough to invest. What’s the alternative to equities and/or bonds

RockIslandLine 7y ago
"Is inflation really never going to show again?" What causes inflation? Inflation is too much money chasing too few goods and services. When populations are growing, you need to expand the money supply to avoid deflation. What happens when populations stop growing?
- paulpauper 7y ago
  Turkey and other economically weak countries have high pop growth and high inflation and high bond yields, so that is not the answer. it has more to do with flight to safety. Countries that are perceived as economically strong and geopolitically stable have low yields, countries that are weak have high yields ,regardless of pop growth.
adventured 7y ago
> Is inflation really never going to show again? In developed economies money is being removed nearly as fast as it's being added, in the form of going into the blackhole of low to negative yielding paper. It's removing a present ~$17 trillion of capital that could otherwise be sloshing around pressing inflation higher. That's an extraordinary amount of money that has largely been rendered non-impacting. There are only a few areas where you see any inflationary pressure in the US, such as in assets like equities and real-estate, due to the Fed rates. In that case you've got people with immense collective free capital pressing aggressively upward on prices (willing to pay a high premium to try to get a return beyond what eg treasuries are offering). It's why Japan can never spark traditional inflation (nor achieve any growth). Their epic pile of low yield debt has sucked a lot of the loose capital out of their economy. It's a giant pile of non-productive, non-active, ineffectual capital. Instead of going toward wage pressure / competition, growth, business formation & loans, VC, productivity investments, R&D, et al. If you could unleash $20-$30 trillion of increasingly low yielding debt back into the US economy, inflation would skyrocket and it would demand far higher rates to control inflationary pressure. It takes several things working in tandem to result in this unusual outcome. Countries outside of the developed world - the first tier, affluent economies - have a near impossible time achieving such low or negative yields, and lack of inflationary pressure.

nostromo 7y ago

This is the real reason the US yield curve looks the way it does. All other developed countries are selling negative or near zero government bonds. This has lead to huge international demand for US 30 year treasuries. https://tradingeconomics.com/bonds https://tradingeconomics.com/bonds US treasuries are giving a greater yield than Italy or Spain for reference. Of course there will be huge demand. Central banks are no longer islands. They are part of the global economy and a part of a market just like any other. The US acting alone to raise interest rates won't work like it did in previous cycles.

robocat 7y ago
Alternatively investors holding USD may believe that EUR will strengthen against USD over 30 years by more than: 0.5% + US_30year_treasury_bond_rate + risk_adjustment A negative interest rate is fine for US investors if you think the exchange rate will shift enough in your favour to cover your costs.
- robocat 7y ago
  Happened before: https://www.bloomberg.com/opinion/articles/2019-08-22/swiss-history-of-negative-interest-rates-is-ugly https://www.bloomberg.com/opinion/articles/2019-08-22/swiss-...
ThrustVectoring 7y ago
US and EU bonds are denominated in different currencies, and the cost to hedge the currency risk with a forward contract eliminates the difference in interest rates. In other words, the effect of the US raising interest rates isn't just to put pressure on EU interest rates, but also to put pressure on the expected future exchange rate.

sunseb 7y ago

Do you think it's a good idea to put some savings in gold?

nostromo 7y ago
As part of a portfolio you hold for decades? Sure. Otherwise? No. https://en.wikipedia.org/wiki/Modern_portfolio_theory https://en.wikipedia.org/wiki/Modern_portfolio_theory
- TheHegemon 7y ago
  No, gold has not outperformed even cash in the last 30 years. It is only worth it if you can time it precisely: https://www.macrotrends.net/1333/historical-gold-prices-100-year-chart https://www.macrotrends.net/1333/historical-gold-prices-100-...
  - nostromo 7y ago
    Read and understand the link I posted. The point of holding gold isn't to increase your returns, but to reduce the volatility of a diversified portfolio.
  - icelancer 7y ago
    >> gold has not outperformed even cash in the last 30 years. It is specifically geared to underperform it in markets like this, so it's doing its job.
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icelancer 7y ago
If you have to ask, the answer is almost certainly "no." There are reasons to hold commodities and precious metals like gold/silver, but they are pretty specific and for retail investors usually circle the idea of hedging against your first-party currency.
rchaud 7y ago

nihilarian 7y ago

This was news about a week ago

thorwasdfasdf 7y ago

I understand that policy makers think that low interest rates will encourage people to put their money into investments like the equities or a business by forcing people out of saving. But, have they ever considered that they may actually be achieving the opposite? Someone who just turned 65 (like aging Europe), really really needs to save in safe assets. Negative yielding bonds don't change that need! So, instead of investing in risky assets, they may simply take the negative yield and save even harder to make up for the negative yield thus reducing spending even further and hurting the economy.

elcomet 7y ago
I think that's the point isn't it? To provide extra-safe assets for people who need it.
- thorwasdfasdf 7y ago
  Their objective is that people won't save the money. They want people to spend the money, the sooner the better, but that goal completely contradicts what a retiree (and aging population) needs/wants to do.
ThrustVectoring 7y ago
The extra saving means higher prices for the assets of current retirees, which should end up resulting in them selling assets and spending the extra money.
imtringued 7y ago
There is also the risk that injecting additional cash into companies that don't need it further disconnects them from the actual economy. Investors can now make money simply through the appreciation of stocks, housing and dividend payments funded by negative interest mortgages. Since companies no longer need to sell more products, services or participate in the economy the end result is that you are not only not stopping deflation, you are actually mildly increasing it.
tachyonbeam 7y ago

jnordwick 7y ago

So it is a zero coupon bond sold above par, but this doesn't mean the bank isn't making money off of it. There are a lot of technical reasons that these can be purchased (such as a tax advantaged stutus or a requirement to hold certain duration on a portfolio). I'm an expert on German bond market, but I expect the actual yield to be positive after taking into account other factors (or there being some regulatory reason). Last time I saw an article on a negative yield mortgage, there were tax resons it was actually coming out positive.

whatok 7y ago
I'm looking at the bond on Bloomberg right now and it's showing a yield of -0.14% with a price of EUR104.54. All things equal, if you buy this bond right now and hold it to maturity, that will be your yield. This is an after-tax yield. I'm not sure what bank you are referring to in the first sentence. These are bonds issued by the country.
- jnordwick 7y ago
  Any after tax yield is going to be an estimate. i no longer have access to a bloomberg login, but does it give its methodology? @ 104.54, YTM would be -0.44 not taking other factors into account. There could also be technical reasons such as collateral requirements or other banking/trading requirements. > I'm not sure what bank you are referring to in the first sentence. These are bonds issued by the country. The purchasing institutions, not the issuing. These mostly banks aren't just giving money away, and they don't really have costs associated with carrying base money since they can just ship cash back to the central bank for reserve credit, i assume under most conditions. And the can always go elsewhere in the eurozone for yield, but they seem to need bunds for particular reason. not sure, i just pretty sure they aren't giving money away for no reason. they could even lay off currency risk and go for US Tsy.

jchrisa 7y ago

Slightly OT but I’ve been trying to google this for a while and there are people reading this who will know where I can look: If a government (pretend US if it helps) stopped collecting taxes, and instead funded the budget by printing money every year, who would be the winners and losers compared to the current system? Where can I go to learn more?

lixtra 7y ago
Look at the discussion around MMT https://en.m.wikipedia.org/wiki/Modern_Monetary_Theory https://en.m.wikipedia.org/wiki/Modern_Monetary_Theory
arbitrage 7y ago
everyone would be losers, because that is insane. see recent history in zimbabwe. the keyword you're looking for is hyperinflation.
- anon84598 7y ago
  But actually, anyone who held a large amount of debt would benefit since the value of their debt would shrink
throwaway123156 7y ago
I suppose it would lead to inflation and as long as the inflation is controlled, that's doable. Effectively, the government is being funded by all dollar holders at that point. It's a wealth tax of sorts imposed on those who hold their wealth in dollars. The idea would be that the government is being funded by the fact that $100 today, is worth only about $90 last year, and that loss in value is what's funding the government.
- jchrisa 7y ago
  So maybe the poor and middle class would be better off and the rich would foot the bill?

whatok 7y ago

Like most economic and finance topics on this site, there seems to be a lot of people posting opinions/"facts" without really understanding the subject matter. The reason why bonds are trading at negative rates in the EU are the following: * The ECB deposit rate is -0.40%. Everything else is benchmarked against that * The majority of the EU is either currently in a recession or rapidly heading there * Inflation expectations are weak

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a11yguy 7y ago

Another reason, I've not seen mentioned, is that you think bonds will go even more negative, so you buy now, to avoid having to buy a much more negative rate later.

docker_up 7y ago

Where can I put my money to take advantage of this? Gold? or just US treasuries?

koolba 7y ago
Life isn’t that simple as you’d have implicit currency conversion risk.
danieltillett 7y ago
Gold miners. With physical gold you have to worry about storage, but gold miners solve this problem. The gold miners have run pretty hard already, but the developers (those building a new gold mine) have not yet moved that much.
- cududa 7y ago
  Both having gold stored somewhere and gold mines assume in the event of the collapse of civilization they’d leave the assets as is.
  - danieltillett 7y ago
    If there is a collapse of civillzation the last thing anyone is going to be worried about is their investment returns. Gold as an asset class does well in periods of low real interest rates. All signs suggest we are going to be in a low real interest rate environment for sometime. One of the nice things about investing in gold miners over just gold is in trying to find the best ones. There is real alpha in this as not all gold mines and gold miners are equal.
teh_infallible 7y ago
Bitcoin

techrich 7y ago

Glad the UK is getting out, this fate will come to the no nations no borders globalists.

deleted 7y ago

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jedberg 7y ago

The best explanation I've heard for negative rates is this: Imagine you have a million dollars worth of cars. If you want to store that in a bank, you'd pay them money to do so. Why? Because the car has no value to the bank. The only thing they can do is store it in the vault, which requires security personnel, space, climate control, etc. Now instead you have a million dollars in cash. In the current environment, where more people want to put money into the bank than take it out, the cash also has no value to the bank. They can't loan it out again because no one wants to borrow that much. So they charge you for storing your money. This is how they make a profit. By slowly taking your balance, since they can't make money loaning it out. A negative interest rate basically means more people want to save money than spend money. When the government offers negative rates, it's because they want people to spend money instead of save it. When a bank does it, it's because more people are putting money in than taking it out.

duxup 7y ago
I have some visibility to a tiny community bank started by some folks and then grew into a larger bank over time. They were mostly a consumer bank (consumer banking, small business type loans, etc) with some side banking related activity. Paradoxically (well seemingly so) the best time for them to buy or merge with other small community banks was if there was an area they wanted to be in ... that was doing well economically. That was the time to look around at the local banks that they might want to pickup, or those banks actually came to them. Local small (usually rural / suburban) community banks would find themselves in a bad spot as the locals were doing well financially, paying off loans early, not really borrowing much, and the locals with their extra money started stuffing it into the local bank. Businesses expanded, but they were able to do so with short term or very limited loans. The local small bank found itself flush with cash, and nobody who wanted it (well not nobody but you get it). That was the time for the other bank to swoop in and save them as they could provide a larger regional reach (and some side businesses that benefited from being backed by all that cash) to areas that still wanted that money for loans.
booleandilemma 7y ago
Thanks for your explanation, I think it helps me to understand what’s happening a little better. But how can I reconcile what you’ve said with articles like this?: https://www.cnbc.com/2018/03/15/bankrate-65-percent-of-americans-save-little-or-nothing.html https://www.cnbc.com/2018/03/15/bankrate-65-percent-of-ameri...

turbinerneiter 7y ago

The most fascinating thing is here is that the German government still refuses to take this basically free money to invest in infrastructure.

PunchTornado 7y ago
useful infrastructure. I see plenty of vanity projects floating around, hate to see Germany implementing some.
rossdavidh 7y ago
I'm not saying your point isn't valid, but: https://en.wikipedia.org/wiki/Berlin_Brandenburg_Airport https://en.wikipedia.org/wiki/Berlin_Brandenburg_Airport Not all German infrastructure spending turns out well.
- turbinerneiter 7y ago
  BER is it's own special case, but the general gist I'm piecing together from media reports is that Germany has a planning problem because there are not enough government workers to plan projects. For example, there is a budget reserved for infrastructure. The poor regions often fail to produce good enough project plans in time. The richer regions have more planners and present additional projects at the end of the year to get the left over money.