4 ms·

This is an example of how to write a good article, I think the first sentence answers your question: "Germany sold 30-year debt at a negative yield for the firs

This is an example of how to write a good article, I think the first sentence answers your question: "Germany sold 30-year debt at a negative yield for the first time, as investors desperate for safe assets bet that further falls in yields will boost the value of the bonds in the future." The investors buying these bonds are simply betting that these bonds will increase in value (which will supposedly happen if central banks cut interest rates more in the future). These bonds don't pay out for 30 years and I bet few if any of the institutions buy them intend to hold them that long, they plan to sell when the value of the bonds rise. So why not just park that money in cash? Well let's say you have $1M and you think bond yields will continue to fall. If bond yields fall further, then the value of these bonds increase, then you can sell them and realize a return. However, you also want to think about any way that your cash holdings could increase. Could a dollar (or euro, or whatever currency) tomorrow be worth more than a dollar today? Yes, if there's deflation then it could make sense to just hoard cash under your mattress and realize that it's purchasing power is growing! But these investors are assuming deflation is not too much of a risk - they believe central banks will act to quickly slash interest rates - both increasing the value of these bonds and decreasing the risk of deflation. Markets are pricing in future interest rate cuts, which is probably not a bad bet to make. Markets a probably predicting interest rate cuts because they think various economies are weakening and central banks will cut rates.

nostrademons 7y ago
The implication then is that we're in a bond bubble. When you're buying something that you know has negative fundamental returns on the assumption that someone will buy it from you at a higher price, that's the definition of a bubble. And like many bubbles, it's entirely possible they'll be right in the short term, but it's basically guaranteed that they'll be wrong in the long term. You know exactly what a bond will be worth in 30 years, and with negative interest rates, you know it'll be worth less than now.
- unreal37 7y ago
  Expecting the price of something to rise in the future is not the definition of a bubble. When people were selling houses in Detroit at the bottom of the housing crisis for $1000, the people buying them were expecting the value to rise in the future. It's almost like profiting off of fear not greed.
  - nostrademons 7y ago
    Expecting the price to rise when you know the underlying fundamentals don't support that price is the definition of a bubble. People buying houses in Detroit have an investment thesis that there will still be people living in Detroit and they will still need houses, and even more broadly, that there will be more people needing more houses than there were at the bottom of the housing crisis. They may be right or wrong, but there's still a thesis based on fundamentals. People buying unbuilt houses in the middle of the Everglades [1] because they heard of prices doubling or tripling within a year is speculation, and many of those areas still have not regained the value that investors paid for them, almost 100 years later, and probably never will. [1] http://www.thebubblebubble.com/florida-property-bubble/ http://www.thebubblebubble.com/florida-property-bubble/
    - Atheros 7y ago
      That's not what's happening with bonds. The underlying fundamentals do support a higher price if interest rates go down. The price would then stay there until interest rates rise. In all of these cases the market price is fully rational and fully supported.
    - unreal37 7y ago
      The bond market, where trillions are traded by sophisticated investors, is by definition efficient. If the price of something is higher than the "fundamentals support", that price will adjust because there are literally billions being traded every hour. You could say that the price of land in the Everglades is set because of unsophisticated investors, with relatively little money at stake. They can't be compared.
  - waqf 7y ago
jnordwick 7y ago
> which will supposedly happen if central banks cut interest rates more in the future). long bonds aren't affected by overnight rates. that's why the yield curve inverts

nostrademons 7y ago

The implication then is that we're in a bond bubble. When you're buying something that you know has negative fundamental returns on the assumption that someone will buy it from you at a higher price, that's the definition of a bubble. And like many bubbles, it's entirely possible they'll be right in the short term, but it's basically guaranteed that they'll be wrong in the long term. You know exactly what a bond will be worth in 30 years, and with negative interest rates, you know it'll be worth less than now.

unreal37 7y ago
Expecting the price of something to rise in the future is not the definition of a bubble. When people were selling houses in Detroit at the bottom of the housing crisis for $1000, the people buying them were expecting the value to rise in the future. It's almost like profiting off of fear not greed.
- nostrademons 7y ago
  Expecting the price to rise when you know the underlying fundamentals don't support that price is the definition of a bubble. People buying houses in Detroit have an investment thesis that there will still be people living in Detroit and they will still need houses, and even more broadly, that there will be more people needing more houses than there were at the bottom of the housing crisis. They may be right or wrong, but there's still a thesis based on fundamentals. People buying unbuilt houses in the middle of the Everglades [1] because they heard of prices doubling or tripling within a year is speculation, and many of those areas still have not regained the value that investors paid for them, almost 100 years later, and probably never will. [1] http://www.thebubblebubble.com/florida-property-bubble/ http://www.thebubblebubble.com/florida-property-bubble/
  - Atheros 7y ago
    That's not what's happening with bonds. The underlying fundamentals do support a higher price if interest rates go down. The price would then stay there until interest rates rise. In all of these cases the market price is fully rational and fully supported.
  - unreal37 7y ago
    The bond market, where trillions are traded by sophisticated investors, is by definition efficient. If the price of something is higher than the "fundamentals support", that price will adjust because there are literally billions being traded every hour. You could say that the price of land in the Everglades is set because of unsophisticated investors, with relatively little money at stake. They can't be compared.
- waqf 7y ago

jnordwick 7y ago

> which will supposedly happen if central banks cut interest rates more in the future). long bonds aren't affected by overnight rates. that's why the yield curve inverts