8 ms·

Interest rates on some European government bonds have gone negative

70 points by cwal37 12y ago

api 12y ago
Economists also thought stagflation was impossible before the USA in the late 70s.
- zenogais 12y ago
  They also thought the efficient-market hypothesis was true, until the financial crisis hit in 2008.
  - chronid 12y ago
    It's like the world is their laboratory, and they run experiments on all of us.
    - api 12y ago
      ... except that we cannot bifurcate history into multiple different timelines and run parallel experiments to test different assumptions. This is why "experiments" in soft sciences like economics or psychology don't necessarily mean the same thing as experiments in a hard science like physics.
      - gd1 12y ago
        And also, interestingly, climate science, where they face a similar problem in having a single enormously complex system that they can't bifurcate and run experiments on. To be fair, even nutrition and digestion and neuroscience/psychology tend to be a pseudo-scientific shitshow, and we've 6 billion test subjects for those. Or even epidemiology, where we get endless statistical garbage about this or that factor leading to cancer. Cancer is a real physical process, triggered by real physical causes (carcinogens, genetics, etc.)... how about we put down the statistics textbook and focus on finding the empirical causes? But again we struggle to do that with 6 billion experimental test beds. So yeah, it is best to take anything like sociology/economics/planetary climate modelling with a big grain of salt, because the simple truth is that we're nowhere near achieving accurate modelling in subjects where we have six billion verification sets, let alone subjects where we have a handful (societies, economies) or one (Earth).
    - 1ris 12y ago
      Most things are complex and it's quite usualy to not know exactly what will happen. What i don't like is the fact that they usually make their policies as if they understood the topic with absolute certainty. Economics is simply not hard science, and it's failing to admit it. And even if it was science, erring was a absolute normal part in process of science.
  - kcole16 12y ago
    The "Black Monday" crash of 1987 was actually the turning point for the efficient market hypothesis. It basically launched the entire field of behavioral finance, as the market plummeted for essentially no reason.
  - bobcostas55 12y ago
    What does the EMH have to do with the financial crisis?
    - ArkyBeagle 12y ago
      Chairman Greenspan thought that banks would behave rationally, and that is a portion in EMH theory.
    - the_why_of_y 12y ago
      EMH claims that marked prices always reflect reality, so the housing bubble of 2000-2007 (with house prices rising at twice the rate as rents) whose bursting caused the financial crisis ought to be impossible.
_sword 12y ago
Europe's economy is in a very bad place
- pdecker 12y ago
  Europe is most likely in the "Late Phase" of their recession...QE will pull up growth some....here's a macro view of the EU I did on my blog a couple of weeks back...would love any feedback. www.theeconomicmachine.tumblr.com/post/108174705732
  - johnloeber 12y ago
    In your post, you wrote "France, Germany, Italy and Spain make up 74% of GDP in the EU, so essentially they drive the economy there." I think you mean the Eurozone, not the EU. You forgot about the UK, which is an EU member state.
    - pdecker 12y ago
      you are correct...thanks for the catch! corrections made
  - cylinder 12y ago
    It seems to me that there really is no hope for developed, advanced economies. There's not a lot to be done, other than high-level technological advancement, within these countries. The high-level tech generates little tax revenue and employs negligible amounts of human labor (actually it usually eliminates jobs). So any economic gains will just be from productivity improvement (via technology and regulatory reform) and selling goods and services to developing countries. It seems to me that the best thing these stagnating developed countries can do is band together and really push to open and develop Africa, the rest of Asia, India, etc. Adding a couple billion to the middle class is their only hope to sell more goods and services; their own birth rates are never coming back nor is immigration the answer as we've seen.
    - pdecker 12y ago
cwal37 12y ago
Thanks for changing the title, I always just err on the side of leaving it, even if it is absolutely terrible (as this one originally was). On the actual topic, it's always interesting to see things go differently than economists expected. I fill an economist-ish role at work and it's kind of amazing to see the union of hand wavey-ness and certainty that pervades so much of the field. We drill down hard on data and stick with open source tools like Python as much as possible, but I definitely look around and see supposition treated as fact.
- SixSigma 12y ago
  Economics is full of false assumptions.
  - pfortuny 12y ago
    You want to say "full of false truths"...
    - SixSigma 12y ago
      why not both !
fiatmoney 12y ago
One thing they don't mention as a cause is regulatory requirements to hold certain classes of sovereign debt or other "risk-free" securities, for instance as collateral.
- bradleyjg 12y ago
  Do the rules forbid holding cash? At least for capital adequacy, I was under the impression that cash, like own-country sovereign debt, is not risk discounted. Normally you'd prefer debt to cash, but if it has a negative nominal yield, I'd think you'd prefer the opposite. Ditto for bonds as currency play, why not cash instead? Frankly the only rational reason I can think of to buy a bond with a negative yield is if the loss is less than the carrying costs of cash. And while that's not free, it's hard to see that anywhere near 100 bps per year on large sums of money.
  - aembleton 12y ago
    There is some costs associated with securing that amount of cash and then I guess you'd want to insure that money in case of theft. The insurer would then need to store a large amount in safe assets, which would then go into bonds. I guess, maybe storage companies might move into this business but it's probably just safer and more convenient to buy a piece of paper.
    - bradleyjg 12y ago
      The Swiss Franc, just to take an example, comes in denominations up to 1000 Franc ($1083 at current exchange rates). According to this site: http://www.pagetutor.com/trillion/index.html http://www.pagetutor.com/trillion/index.html $100M fits on a pallet stacked 3 feet high or so. With banknotes worth 10x as much, that'd be a billion Swiss francs. It's hard to believe it is going to cost you 8.12 million francs to securely store that for two years, which is what you'll currently pay for the privilege of owning the two year Swiss bond.
      - brohee 12y ago
DunbarTrout 12y ago
Could someone buy one of these negative bonds in hopes to short sell it? I barely understand shorting, but it seems like this would be an opportunity (I realize shorting is always risky).
- driverdan 12y ago
  Shorting means borrowing the asset from someone else and selling it, not buying then selling. I'd guess shorting isn't allowed but could be wrong. It certainly should be allowed.
  - ewood 12y ago
    There are secondary markets for most bonds so yes, you can short them. However most traders would do this through derivatives such as bond futures or ETFs.
    - whatok 12y ago
      Most traders would pick the optimal instrument to express their view which could end up being bond futures or ETFs but not always.
DunbarTrout 12y ago
Could someone buy one of these negative bonds in hopes to short sell it? I barely understand shorting, but it seems like this would be an opportunity (I realize shorting is always risky).
deleted 12y ago
[deleted]
deleted 12y ago
[deleted]
randomname2 12y ago
A lot of this is also frontrunning the central banks. The ECB has already indicated they will buy german bonds (which have negative yield). Rates can (and will) go even negative-er, so if you buy now and sell later, you still make a profit.
mrb 12y ago
"And yet it seems the impossible has happened." This is a great example showing how little we understand economics, which is very ironic: economics is the study of something that is 100% man-made, yet we cannot explain many of its aspects. Heck I am more confident in physicists able to explain physics, and mathematicians able to explain mathematics, than in economists able to explain economics. This is why topics such as basic income guarantee [1], Bitcoin and cryptocurrencies, inflation vs deflation, capitalism vs socialism, etc, are all so debated. Nobody agrees on anything because quite frankly, we don't know how to make the economy work optimally. I would not be surprised if, 50 or 100 years from now, widely accepted views on economics will completely change. [1] There was a great HN post from yesterday: https://news.ycombinator.com/item?id=9004287 https://news.ycombinator.com/item?id=9004287
- deleted 12y ago
  [deleted]
- manachar 12y ago
  > we don't know how to make the economy work optimally What's optimally? Seems that many people passionately disagree on this point and may help explain our difficulty in determining what should be done. Additionally, economics is a young discipline that's more about trying to figure out unreproducible complex human behavior than something that can be replicated in a lab.
  - collyw 12y ago
    This would be fine except that economists and politicians seem to imply that they are running thing "optimally" and they know what they are doing.
- TheCraiggers 12y ago
  > This is a great example showing how little we understand economics, which is very ironic: economics is the study of something that is 100% man-made, yet we cannot explain many of its aspects. Heck I am more confident in physicists able to explain physics, and mathematicians able to explain mathematics, than in economists able to explain economics. Physicists and mathematicians often have the advantage that if they run an experiment / solve a problem by using the same inputs, they can expect the same output. Obviously this is not the case for economics, which at its core is driven by human interactions. Not only does it often have many, many variables, but they're also difficult to control. In my estimation, it's actually impressive we have as good a grasp as we do on economics.
RaCaS123 12y ago
Certain corporate baonds have as well. Notably, Nestle's are negative.
- wereHamster 12y ago
  Oh, so you read the article? First paragraph...
nostromo 12y ago
I can't shake the feeling we're going to see another black swan in '15 or '16. Maybe the epicenter will be Greece this time instead of Bear Stearns. http://i.imgur.com/UyM0j2M.jpg http://i.imgur.com/UyM0j2M.jpg I'm curious to see what the Fed will do if we have a correction while interest rates are at zero. I suppose 0% + QE will become standard policy rather than a response to a crisis.
- ollifi 12y ago
  You might be right, but I don't know if that counts as black swan. Greece and euro troubles were mainstream headlines five years ago spring of 2010. Through out the years the situation has been evolving and nobody of course knows how it will unravel. I'm more surprised how slow the buildup is.
kazinator 12y ago
This should be no news to consumers who have been accustomed to parking their money in negative bonds. These are called "checking and savings accounts", where interest is next to nonexistent, and the balance is nibbled away by various fees. People still put their money in the bank for similar reasons why people buy these negative interest bonds: for example, it's secure, and cheaper than building your own safe, putting cash in it, and guarding it. If you want to hold some foreign currency, you could just buy it and have it sitting in a trading account. But there are perhaps some fees involved which are worse than parking it in a negative bond. The account may also not be secured compared to a bond.
tosseraccount 12y ago
US Treasury yields went negative in 2008 ... http://www.nytimes.com/2008/12/10/business/10markets.html http://www.nytimes.com/2008/12/10/business/10markets.html http://blogs.wsj.com/marketbeat/2008/12/09/three-month-bill-yield-goes-negative/ http://blogs.wsj.com/marketbeat/2008/12/09/three-month-bill-...
- remarkEon 12y ago
  Right, but what's interesting right now is that EU corporate paper had a negative yield for a while there. That hasn't happened before.
jhundal 12y ago
I'm not sure this article gets the definition of the zero lower bound right (though I'd love to be corrected if it does.) As I understood it, the ZLB only applies to central bank lending rates to other banks, which if they become negative the other banks only have the incentive to hoard cash.

70 points by cwal37 12y ago

api 12y ago

Economists also thought stagflation was impossible before the USA in the late 70s.

zenogais 12y ago
They also thought the efficient-market hypothesis was true, until the financial crisis hit in 2008.
- chronid 12y ago
  It's like the world is their laboratory, and they run experiments on all of us.
  - api 12y ago
    ... except that we cannot bifurcate history into multiple different timelines and run parallel experiments to test different assumptions. This is why "experiments" in soft sciences like economics or psychology don't necessarily mean the same thing as experiments in a hard science like physics.
    - gd1 12y ago
      And also, interestingly, climate science, where they face a similar problem in having a single enormously complex system that they can't bifurcate and run experiments on. To be fair, even nutrition and digestion and neuroscience/psychology tend to be a pseudo-scientific shitshow, and we've 6 billion test subjects for those. Or even epidemiology, where we get endless statistical garbage about this or that factor leading to cancer. Cancer is a real physical process, triggered by real physical causes (carcinogens, genetics, etc.)... how about we put down the statistics textbook and focus on finding the empirical causes? But again we struggle to do that with 6 billion experimental test beds. So yeah, it is best to take anything like sociology/economics/planetary climate modelling with a big grain of salt, because the simple truth is that we're nowhere near achieving accurate modelling in subjects where we have six billion verification sets, let alone subjects where we have a handful (societies, economies) or one (Earth).
  - 1ris 12y ago
    Most things are complex and it's quite usualy to not know exactly what will happen. What i don't like is the fact that they usually make their policies as if they understood the topic with absolute certainty. Economics is simply not hard science, and it's failing to admit it. And even if it was science, erring was a absolute normal part in process of science.
- kcole16 12y ago
  The "Black Monday" crash of 1987 was actually the turning point for the efficient market hypothesis. It basically launched the entire field of behavioral finance, as the market plummeted for essentially no reason.
- bobcostas55 12y ago
  What does the EMH have to do with the financial crisis?
  - ArkyBeagle 12y ago
    Chairman Greenspan thought that banks would behave rationally, and that is a portion in EMH theory.
  - the_why_of_y 12y ago
    EMH claims that marked prices always reflect reality, so the housing bubble of 2000-2007 (with house prices rising at twice the rate as rents) whose bursting caused the financial crisis ought to be impossible.

_sword 12y ago

Europe's economy is in a very bad place

pdecker 12y ago
Europe is most likely in the "Late Phase" of their recession...QE will pull up growth some....here's a macro view of the EU I did on my blog a couple of weeks back...would love any feedback. www.theeconomicmachine.tumblr.com/post/108174705732
- johnloeber 12y ago
  In your post, you wrote "France, Germany, Italy and Spain make up 74% of GDP in the EU, so essentially they drive the economy there." I think you mean the Eurozone, not the EU. You forgot about the UK, which is an EU member state.
  - pdecker 12y ago
    you are correct...thanks for the catch! corrections made
- cylinder 12y ago
  It seems to me that there really is no hope for developed, advanced economies. There's not a lot to be done, other than high-level technological advancement, within these countries. The high-level tech generates little tax revenue and employs negligible amounts of human labor (actually it usually eliminates jobs). So any economic gains will just be from productivity improvement (via technology and regulatory reform) and selling goods and services to developing countries. It seems to me that the best thing these stagnating developed countries can do is band together and really push to open and develop Africa, the rest of Asia, India, etc. Adding a couple billion to the middle class is their only hope to sell more goods and services; their own birth rates are never coming back nor is immigration the answer as we've seen.
  - pdecker 12y ago

cwal37 12y ago

Thanks for changing the title, I always just err on the side of leaving it, even if it is absolutely terrible (as this one originally was). On the actual topic, it's always interesting to see things go differently than economists expected. I fill an economist-ish role at work and it's kind of amazing to see the union of hand wavey-ness and certainty that pervades so much of the field. We drill down hard on data and stick with open source tools like Python as much as possible, but I definitely look around and see supposition treated as fact.

SixSigma 12y ago
Economics is full of false assumptions.
- pfortuny 12y ago
  You want to say "full of false truths"...
  - SixSigma 12y ago
    why not both !

fiatmoney 12y ago

One thing they don't mention as a cause is regulatory requirements to hold certain classes of sovereign debt or other "risk-free" securities, for instance as collateral.

bradleyjg 12y ago
Do the rules forbid holding cash? At least for capital adequacy, I was under the impression that cash, like own-country sovereign debt, is not risk discounted. Normally you'd prefer debt to cash, but if it has a negative nominal yield, I'd think you'd prefer the opposite. Ditto for bonds as currency play, why not cash instead? Frankly the only rational reason I can think of to buy a bond with a negative yield is if the loss is less than the carrying costs of cash. And while that's not free, it's hard to see that anywhere near 100 bps per year on large sums of money.
- aembleton 12y ago
  There is some costs associated with securing that amount of cash and then I guess you'd want to insure that money in case of theft. The insurer would then need to store a large amount in safe assets, which would then go into bonds. I guess, maybe storage companies might move into this business but it's probably just safer and more convenient to buy a piece of paper.
  - bradleyjg 12y ago
    The Swiss Franc, just to take an example, comes in denominations up to 1000 Franc ($1083 at current exchange rates). According to this site: http://www.pagetutor.com/trillion/index.html http://www.pagetutor.com/trillion/index.html $100M fits on a pallet stacked 3 feet high or so. With banknotes worth 10x as much, that'd be a billion Swiss francs. It's hard to believe it is going to cost you 8.12 million francs to securely store that for two years, which is what you'll currently pay for the privilege of owning the two year Swiss bond.
    - brohee 12y ago

DunbarTrout 12y ago

Could someone buy one of these negative bonds in hopes to short sell it? I barely understand shorting, but it seems like this would be an opportunity (I realize shorting is always risky).

driverdan 12y ago
Shorting means borrowing the asset from someone else and selling it, not buying then selling. I'd guess shorting isn't allowed but could be wrong. It certainly should be allowed.
- ewood 12y ago
  There are secondary markets for most bonds so yes, you can short them. However most traders would do this through derivatives such as bond futures or ETFs.
  - whatok 12y ago
    Most traders would pick the optimal instrument to express their view which could end up being bond futures or ETFs but not always.

DunbarTrout 12y ago

Could someone buy one of these negative bonds in hopes to short sell it? I barely understand shorting, but it seems like this would be an opportunity (I realize shorting is always risky).

deleted 12y ago

[deleted]

deleted 12y ago

[deleted]

randomname2 12y ago

A lot of this is also frontrunning the central banks. The ECB has already indicated they will buy german bonds (which have negative yield). Rates can (and will) go even negative-er, so if you buy now and sell later, you still make a profit.

mrb 12y ago

"And yet it seems the impossible has happened." This is a great example showing how little we understand economics, which is very ironic: economics is the study of something that is 100% man-made, yet we cannot explain many of its aspects. Heck I am more confident in physicists able to explain physics, and mathematicians able to explain mathematics, than in economists able to explain economics. This is why topics such as basic income guarantee [1], Bitcoin and cryptocurrencies, inflation vs deflation, capitalism vs socialism, etc, are all so debated. Nobody agrees on anything because quite frankly, we don't know how to make the economy work optimally. I would not be surprised if, 50 or 100 years from now, widely accepted views on economics will completely change. [1] There was a great HN post from yesterday: https://news.ycombinator.com/item?id=9004287 https://news.ycombinator.com/item?id=9004287

deleted 12y ago
[deleted]
manachar 12y ago
> we don't know how to make the economy work optimally What's optimally? Seems that many people passionately disagree on this point and may help explain our difficulty in determining what should be done. Additionally, economics is a young discipline that's more about trying to figure out unreproducible complex human behavior than something that can be replicated in a lab.
- collyw 12y ago
  This would be fine except that economists and politicians seem to imply that they are running thing "optimally" and they know what they are doing.
TheCraiggers 12y ago
> This is a great example showing how little we understand economics, which is very ironic: economics is the study of something that is 100% man-made, yet we cannot explain many of its aspects. Heck I am more confident in physicists able to explain physics, and mathematicians able to explain mathematics, than in economists able to explain economics. Physicists and mathematicians often have the advantage that if they run an experiment / solve a problem by using the same inputs, they can expect the same output. Obviously this is not the case for economics, which at its core is driven by human interactions. Not only does it often have many, many variables, but they're also difficult to control. In my estimation, it's actually impressive we have as good a grasp as we do on economics.

RaCaS123 12y ago

Certain corporate baonds have as well. Notably, Nestle's are negative.

wereHamster 12y ago
Oh, so you read the article? First paragraph...

nostromo 12y ago

I can't shake the feeling we're going to see another black swan in '15 or '16. Maybe the epicenter will be Greece this time instead of Bear Stearns. http://i.imgur.com/UyM0j2M.jpg http://i.imgur.com/UyM0j2M.jpg I'm curious to see what the Fed will do if we have a correction while interest rates are at zero. I suppose 0% + QE will become standard policy rather than a response to a crisis.

ollifi 12y ago
You might be right, but I don't know if that counts as black swan. Greece and euro troubles were mainstream headlines five years ago spring of 2010. Through out the years the situation has been evolving and nobody of course knows how it will unravel. I'm more surprised how slow the buildup is.

kazinator 12y ago

This should be no news to consumers who have been accustomed to parking their money in negative bonds. These are called "checking and savings accounts", where interest is next to nonexistent, and the balance is nibbled away by various fees. People still put their money in the bank for similar reasons why people buy these negative interest bonds: for example, it's secure, and cheaper than building your own safe, putting cash in it, and guarding it. If you want to hold some foreign currency, you could just buy it and have it sitting in a trading account. But there are perhaps some fees involved which are worse than parking it in a negative bond. The account may also not be secured compared to a bond.

tosseraccount 12y ago

US Treasury yields went negative in 2008 ... http://www.nytimes.com/2008/12/10/business/10markets.html http://www.nytimes.com/2008/12/10/business/10markets.html http://blogs.wsj.com/marketbeat/2008/12/09/three-month-bill-yield-goes-negative/ http://blogs.wsj.com/marketbeat/2008/12/09/three-month-bill-...

remarkEon 12y ago
Right, but what's interesting right now is that EU corporate paper had a negative yield for a while there. That hasn't happened before.

jhundal 12y ago

I'm not sure this article gets the definition of the zero lower bound right (though I'd love to be corrected if it does.) As I understood it, the ZLB only applies to central bank lending rates to other banks, which if they become negative the other banks only have the incentive to hoard cash.