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The reason folks don't do this is in your last sentence: stocks are not risk-free, and you're vulnerable to market downturns. Or sometimes people do do this, a
by nostrademons 6y ago
The reason folks don't do this is in your last sentence: stocks are not risk-free, and you're vulnerable to market downturns. Or sometimes people do do this, and they get swept out of the market when a downturn happens.
Same thing with bonds, mortgages, and loans: there's default risk.
Taking out debt at a negative interest rate has no such default risk: since you borrowed the money in the first place, if you default the lender is out the principal, not you.
(It's also worth noting that there are a few risk-free assets that offer yields higher than 0%: U.S. Treasuries, and U.S. savings accounts. And there is a predictable carry trade of firms borrowing at 0 in the EU, converting their Euros to dollars, and then depositing in the U.S. at > 0. The risk then becomes currency risk, the chance that the dollar will depreciate, which is also happening.)
- s1artibartfast 6y ago>Taking out debt at a negative interest rate has no such default risk: since you borrowed the money in the first place, if you default the lender is out the principal, not you. I don't think this is accurate, as there is still risk because we are talking about a mortgage, not just a negative interest loan. A mortgage comes with down payment and a house for collateral. You can end up underwater on an interest free home mortgage just as easy as one with a positive mortgage. The only difference is your monthly payment is lower without mortgage interest. Also, if you default on the mortgage, you are also out your 20% down payment. The part I find interesting about the current situation is that stocks are sky high going higher, but loan interest is low. This indicates to me that banks and institutions are desperate to park money anywhere but the stock market despite the incredible market performance.