Trying To Wrap My Brain Around Negative Bond Yields

giorgio11giorgio11 Posts: 3,150 ✭✭✭✭✭

I keep seeing all the headlines about negative bond yields and wonder why anyone would invest in such a financial instrument. Only thing I can come up with is if someone thought that for a longer term than the bond, yields would go even lower than on the bond and so this would be deflation protection, essentially. Am I missing something here? And isn't this essentially forecasting deflationary trends around the world (or at least in a lot of places)?

Thanks ... talk amongst yourselves.

Kind regards,

George

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Comments

  • jmski52jmski52 Posts: 19,721 ✭✭✭✭✭

    Read "The Dao of Capital" and you will note that reality comes into play (by necessity) at some critical juncture. What's been going on for some time now is what Ron Paul refers to as "mal-investment", and I do believe that he's correct.

    The only thing that negative bond yields support is the entrenched bankers & politicians and their salaries, perks, bonuses and gold-plated Cadillac healthcare. There is NO investment rationale for negative bond yields. It's much akin to pointing a gun at the heads of the general population and taking our wallets, nothing more.

    Bond yields are a non-issue for you and I, but they are a real conundrum for the retirement fund managers who are stuck with projections that can't possibly be met.

    Q: Are You Printing Money? Bernanke: Not Literally

    I knew it would happen.
  • rickoricko Posts: 68,384 ✭✭✭✭✭

    Just as @jmski52 said... it is legalized robbery.....Cheers, RickO

  • MsMorrisineMsMorrisine Posts: 23,191 ✭✭✭✭✭
    edited August 13, 2019 6:57AM

    some say that it creates an over investment in real estate as it is cheaper to borrow and there is the hope of future price appreciation. perhaps if 2008 doesn't repeat itself.

    I note that on CNBC one country recently made the news with a bank or banks having the first negative interest rate on a mortgage.

    the major players are sometimes asking to translate their money into physical cash and hold it in the banks' vaults.

    Current maintainer of Stone's Master List of Favorite Websites // My BST transactions
  • cohodkcohodk Posts: 15,729 ✭✭✭✭✭

    Some folks buy bonds for appreciation, not just yield.

    You may not have wanted to buy the 100 year bond issued by Austria 2 years ago yielding 2.1%, but today that investor has seen the value of that bond rise 70%. And it will keep going up if rates contimue to fall, even if those rates fall below zero.


    Excuses are tools of the ignorant
    Knowledge is the enemy of fear
  • MsMorrisineMsMorrisine Posts: 23,191 ✭✭✭✭✭

    yeah, someone was joking on CNBC the other day that right now stocks are for dividends and bonds are for capital gains

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  • BaleyBaley Posts: 21,112 ✭✭✭✭✭

    Read "The Dead Capital" and you will note that "parked" money, while safe, is not productive

    Liberty: Parent of Science & Industry

  • MsMorrisineMsMorrisine Posts: 23,191 ✭✭✭✭✭

    oh no. it is not productive for sure, but we have the keep something in cash idea. then there are the retirees who are living on fixed income and savings who are being hurt by negative rates.

    Current maintainer of Stone's Master List of Favorite Websites // My BST transactions
  • OverdateOverdate Posts: 6,358 ✭✭✭✭

    Negative interest rates could be considered storage fees for electronic cash (or cash equivalents).

    If bond yields go negative, the government can, in theory, borrow as much as it likes without increasing interest payments on the national debt. (Until interest rates go positive again, anyway.)

    If long-term deflation occurs, the purchasing power of a bond may increase even though its nominal value is decreasing. This could happen if new technology brings down prices faster than government money printing drives them up.

    My Adolph A. Weinman signature :)

  • MsMorrisineMsMorrisine Posts: 23,191 ✭✭✭✭✭
    edited August 13, 2019 12:39PM

    By Jack Hough
    July 26, 2019

    If tight trousers have taught us anything, it’s that developments in Europe can eventually squeeze America. Euro-denominated bonds from companies like McDonald’s (ticker: MCD), Apple (AAPL), and AT&T (T) are priced for negative yields, but for the most part, U.S. yields are positive—flirty, really, by comparison. That’s luring capital, which is pushing up the dollar, which is crimping manufacturing. The Federal Reserve looks certain to return to interest-rate cutting in the days ahead. Don’t get too used to collecting 2% on safe money.

    https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&uact=8&ved=2ahUKEwi278P4wIDkAhWGiOAKHcqjA3AQFjABegQIAhAB&url=https://www.barrons.com/articles/why-some-investors-are-buying-bonds-that-lose-money-51564179385&usg=AOvVaw27B9Lv106Xt5b4m53g3Vx5

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  • MsMorrisineMsMorrisine Posts: 23,191 ✭✭✭✭✭

    from above:

    There is a limit to low yields. Deutsche Bank economists have been studying “the reversal rate,” a level at which rate cuts begin hurting lending, rather than helping. We don’t know quite where it is, but it might not be far off, they write. Already, the European Central Bank must weigh the prospect of boosting the economy against that of harming banks.

    If yields are indeed near bottom, expect central bankers to turn to more-creative means for stimulus during the next downturn.

    Current maintainer of Stone's Master List of Favorite Websites // My BST transactions
  • SoldiSoldi Posts: 834 ✭✭✭✭

    If yields are indeed near bottom, expect central bankers to turn to more-creative means for stimulus during the next downturn.........................................................._The Fed is out of monetary bullets. _

    _Harry Truman; "Get me a one-handed economist ! _

  • MsMorrisineMsMorrisine Posts: 23,191 ✭✭✭✭✭

    @Soldi said:
    If yields are indeed near bottom, expect central bankers to turn to more-creative means for stimulus during the next downturn.........................................................._The Fed is out of monetary bullets. _

    _Harry Truman; "Get me a one-handed economist ! _

    In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 2 to 2-1/4 percent.

    they have 8 more bullets.

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  • SoldiSoldi Posts: 834 ✭✭✭✭

    Non e Vero !
    We're not Greece
    We are not Europe
    We are not Denmark
    We are not interested in becoming Japan.
    There is a bigger picture and there isn't enough room

  • meluaufeetmeluaufeet Posts: 531 ✭✭✭

    It's the price, not the yield.

  • MsMorrisineMsMorrisine Posts: 23,191 ✭✭✭✭✭

    make it somehow possible for the Fed to open a so called "good bank gone bad."

    fund it using QE and lend to any jerk with a business plan beyond "I want federal aid"

    anyone want to open an infrastructure construction business? It could also pay to train employees who are then put under a work contract.

    sometime somehow we need to fix the FDR in NYC.

    Current maintainer of Stone's Master List of Favorite Websites // My BST transactions
  • ShadyDaveShadyDave Posts: 1,564 ✭✭✭✭✭

    @Overdate said:
    Negative interest rates could be considered storage fees for electronic cash (or cash equivalents).

    If bond yields go negative, the government can, in theory, borrow as much as it likes without increasing interest payments on the national debt. (Until interest rates go positive again, anyway.)

    If long-term deflation occurs, the purchasing power of a bond may increase even though its nominal value is decreasing. This could happen if new technology brings down prices faster than government money printing drives them up.

    That is why it is imperative that we never allow the government and bankers to convert the USA to a "NO Cash" economy. There would be no hiding and no stopping "them" from applying negative interest rates.

    @MsMorrisine said:
    from above:

    There is a limit to low yields. Deutsche Bank economists have been studying “the reversal rate,” a level at which rate cuts begin hurting lending, rather than helping. We don’t know quite where it is, but it might not be far off, they write. Already, the European Central Bank must weigh the prospect of boosting the economy against that of harming banks.

    If yields are indeed near bottom, expect central bankers to turn to more-creative means for stimulus during the next downturn.

    The more creative means would be what Cypress did with their "bail-in". They took private depositors funds to pay for the bank(s) mistakes. This is why I spread my funds throughout many banks and broker dealers and try to contribute as much money to a Roth 401(k) as opposed to a traditional 401(k) as possible. If things are getting really bad, I'd be able to withdraw roth funds (minus gains) without taking a 10% penalty.

    https://www.forbes.com/sites/nathanlewis/2013/05/03/the-cyprus-bank-bail-in-is-another-crony-bankster-scam/#73300aff2685

  • SoldiSoldi Posts: 834 ✭✭✭✭

    @MsMorrisine said:

    @Soldi said:
    If yields are indeed near bottom, expect central bankers to turn to more-creative means for stimulus during the next downturn.........................................................._The Fed is out of monetary bullets. _

    _Harry Truman; "Get me a one-handed economist ! _

    In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 2 to 2-1/4 percent.

    they have 8 more bullets.

    Fiscal and Monetary muscle are the only two things the Fed has or EVER has had. There are no bullets in the chamber for Monetary stimulus, furthermore Fiscal muscle is all that is left and all that will work. Corporations will have to "bail in" to fix infrastructure and drive rates up. This is a serious test of Our financial system based on positive returns continuing to work.

  • MsMorrisineMsMorrisine Posts: 23,191 ✭✭✭✭✭

    the federal reserve does not have fiscal control. that is what the federal government has

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  • cohodkcohodk Posts: 15,729 ✭✭✭✭✭

    @MsMorrisine said:
    the federal reserve does not have fiscal control. that is what the federal government has

    Whom are put in place by us. We have the control. But we give it away every other November. Stupid is as stupid does.


    Excuses are tools of the ignorant
    Knowledge is the enemy of fear
  • derrybderryb Posts: 27,167 ✭✭✭✭✭

    @MsMorrisine said:
    the federal reserve does not have fiscal control.

    Only because those that do have fiscal control could care less what taxpayers have to pay in interest for the spending. A prudent spender would borrow less when paying higher rates and effectively be under the control of those who set the interest rate.

  • SoldiSoldi Posts: 834 ✭✭✭✭
    edited August 24, 2019 7:10AM

    @derryb said:

    @MsMorrisine said:
    the federal reserve does not have fiscal control.

    Only because those that do have fiscal control could care less what taxpayers have to pay in interest for the spending. A prudent spender would borrow less when paying higher rates and effectively be under the control of those who set the interest rate.

    Yes, it is_** naive_ to think that the Fed's policy doesn't influence gov't_ fiscal**_ policy. "Powell highlights fed's limits and Trump calls him an enemy" NYT article.

    I like others here are trying to keep it simple. Regards

    Economic study makes for heckafied arguments

  • cohodkcohodk Posts: 15,729 ✭✭✭✭✭

    Yet our President is firmly on board with this folly.

    Stand your ground Mr. Powell, stand your ground


    Excuses are tools of the ignorant
    Knowledge is the enemy of fear
  • SoldiSoldi Posts: 834 ✭✭✭✭

    @cohodk said:

    Yet our President is firmly on board with this folly.

    Stand your ground Mr. Powell, stand your ground

    Should be fun figuring out how much we don't owe each other.

  • metalmeistermetalmeister Posts: 3,743 ✭✭✭✭

    I guess my 1 year 3% won't renew at 3% next year.

    email: [email protected]

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  • MsMorrisineMsMorrisine Posts: 23,191 ✭✭✭✭✭

    @derryb said:
    do not negative rates devalue the currency further?

    Yes.

    Thus currency war.

    Current maintainer of Stone's Master List of Favorite Websites // My BST transactions
  • cohodkcohodk Posts: 15,729 ✭✭✭✭✭

    @derryb said:
    do not negative rates devalue the currency further?

    No


    Excuses are tools of the ignorant
    Knowledge is the enemy of fear
  • MsMorrisineMsMorrisine Posts: 23,191 ✭✭✭✭✭

    Uhoh
    Cohodk and I disagree

    Where are you coming from Cohodk?

    Current maintainer of Stone's Master List of Favorite Websites // My BST transactions
  • HigashiyamaHigashiyama Posts: 1,287 ✭✭✭
    edited August 24, 2019 6:54PM

    To go back to the OP, it is very reasonable that you are having trouble wrapping your brain around negative interest rates. In fact, until around 5 years ago, virtually all models of interest rates used in quantitative finance floored interest rates at zero. Newer models allow for negative rates, though they may have a floor at some rate that accounts for the liquidity value of holding a negative yield bond. (but not the impact of central bank interventions, which is rather difficult to model)

    Some questions are;

    Why would anyone buy a negative yield bond?

    1. The central banks are big buyers of course, and they are doing it in the name of market interventions.
    2. Bond traders buy and sell them to earn trading income, but they are of course not long term holders, in general
    3. Some short term instruments may be held in lieu of cash. Literal cash is cumbersome to hold and there's not much of it.
    4. Longer term bonds may be purchased along with a currency swap as a means of slightly enhancing a yield
    5. Some insurers may be buying bonds as part of an ALM strategy
    6. If one anticipates deflation, buying negative yield bonds could be viewed as 'rational'

    Nonetheless, remove item (1) above, and it is somewhat hard to believe that a new market equilibrium would emerge in which rates are negative.

    Why isn't this all inflationary?

    1. There is global excess capacity in a wide range of goods and services
    2. Up until now, globalization has been dis-inflationary
    3. Technology has been dis-inflationary or deflationary ... better supply chains, price discovery, 'recycling', etc
    4. Demographics ... aging populations tend to be cautious and spend and invest less
    5. QE has created money on bank balance sheets but has not really put money in the hands of people who want to spend it.

    One related comment: equity and sweat equity have replace debt financing for certain types of business development, especially in the developed markets (which is where we are seeing negative yields), so there is less of a demand for debt financing.

    Higashiyama
  • cohodkcohodk Posts: 15,729 ✭✭✭✭✭
    edited August 24, 2019 6:16PM

    Can i agree 10x to Higashiyama?

    At some point negative yields will break. And will break hard. IE...100 basis point rise in a week, 200 bps in 2 months, 300 bps in 6 months. Wont that be exciting!!

    MsMorrisine.....folks tend to hoard cash which causes it to become scarce thus driving up its value. Velocity ceases. The cycle builds upon itself.


    Excuses are tools of the ignorant
    Knowledge is the enemy of fear
  • DrBusterDrBuster Posts: 3,879 ✭✭✭✭

    @Higashiyama said:

    One related comment: equity and sweat equity have replace debt financing for certain types of business development, especially in the developed markets (which is where we are seeing negative yields), so there is less of a demand for debt financing.

    The studio beverages have me wanting to play a little bit this evening...;)

    The play to lean debt financing demand in developed markets...is it to redirect a prop up elsewhere that is valid, undervalued, failing....etc? And at what size level?

    Equity/sweat EQ...aren't those a build up of extremely local economic ventures against the globo-banking-com-gov drives? Take Sally-hit-the-lotto for a couple million, where's she gonna put it if she's smart but doesn't like paying attention every paycheck anymore??

    1. There is global excess capacity in a wide range of goods and services
    2. Up until now, globalization has been dis-inflationary
    3. Technology has been dis-inflationary or deflationary ... better supply chains, price discovery, 'recycling', etc

    We're just getting started...#3.

  • cohodkcohodk Posts: 15,729 ✭✭✭✭✭

    @MsMorrisine said:
    Uhoh
    Cohodk and I disagree

    Where are you coming from Cohodk?

    Think Time Value of Money.


    Excuses are tools of the ignorant
    Knowledge is the enemy of fear
  • MsMorrisineMsMorrisine Posts: 23,191 ✭✭✭✭✭

    mom and pop are tiny players.

    how about institutional players selling local and buying dollars to get into interest paying treasuries and the stock market.

    Current maintainer of Stone's Master List of Favorite Websites // My BST transactions
  • OverdateOverdate Posts: 6,358 ✭✭✭✭

    I don't think negative interest rates will ever reach the retail market, such as credit cards and home mortgages.

    My Adolph A. Weinman signature :)

  • MsMorrisineMsMorrisine Posts: 23,191 ✭✭✭✭✭

    “They’ve had a dampening effect on economic growth,” Warne said. “You worry more about what negative interest rates mean for the economy and your future rather than focusing on the very good deal on the mortgage.”

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  • cohodkcohodk Posts: 15,729 ✭✭✭✭✭

    Excuses are tools of the ignorant
    Knowledge is the enemy of fear
  • OverdateOverdate Posts: 6,358 ✭✭✭✭

    @Overdate said:
    I don't think negative interest rates will ever reach the retail market, such as credit cards and home mortgages.

    I guess I was wrong.

    https://businessinsider.com/danish-bank-offers-mortgages-at-negative-interest-rates-2019-8

    I'd move to Denmark if I could afford the heating bills.

    My Adolph A. Weinman signature :)

  • SoldiSoldi Posts: 834 ✭✭✭✭
    edited September 2, 2019 8:50AM

    **

  • SoldiSoldi Posts: 834 ✭✭✭✭
    edited September 2, 2019 8:50AM

    **

  • derrybderryb Posts: 27,167 ✭✭✭✭✭

    Makes one realize that money is currently highly overvalued. Should be great for gold, which after all, is simply a measure of currency confidence.

  • BaleyBaley Posts: 21,112 ✭✭✭✭✭

    Gold is simply one of many metallic elements.

    Any other description, utility, or value is just as much an artificial human construct as any other element, compound, or device, including but not limited to dollars.

    This is self evident and beyond debate. The only mystery is future relative performance vs any pair or number of such assets.

    Liberty: Parent of Science & Industry

  • derrybderryb Posts: 27,167 ✭✭✭✭✭
    edited September 2, 2019 5:24PM

    @Baley said:
    Gold is simply one of many metallic elements.

    Any other description, utility, or value is just as much an artificial human construct as any other element, compound, or device, including but not limited to dollars.

    This is self evident and beyond debate. The only mystery is future relative performance vs any pair or number of such assets.

    So, you've discovered that value of something is assigned by the person either selling or buying. Major economic discovery. Keep up the good work.

  • BaleyBaley Posts: 21,112 ✭✭✭✭✭

    Some of us wouldn't be obliged to state the obvious if others didn't insist on posting the ridiculous 😉

    Liberty: Parent of Science & Industry

  • jmski52jmski52 Posts: 19,721 ✭✭✭✭✭

    Negative rates, elimination of cash, and capital controls all amount to the payment of "tribute" to bankers and politicians - nothing more, nothing less. This push is unethical, immoral and nasty. It destroys incentive to work, destroys innovation, destroys risk-taking by productive enterprise and rewards both corrupt insiders & freeloading goldbrickers - this oppressive and well-documented syndicate needs to be obliterated.

    Anyone pushing 100 year bonds can be easily-identified as the saboteur of any type of freedom.

    The US Constitution is one of the best things that ever happened to us, individually and collectively.

    If things are getting really bad, I'd be able to withdraw roth funds (minus gains) without taking a 10% penalty.

    The 10% penalty is peanuts, in the scheme of things.

    they have 8 more bullets.

    Maybe so, maybe not. $17 trillion in negative yielding debt, on top of massive interlocked derivatives makes the equation impossible to understand. We have been in uncharted territory for a long time now. The numbers don't work. Math matters.

    Can i agree 10x to Higashiyama?

    I agree 5X. Note that his reasons why anyone would buy a negative bond yield highlights the fact that only certain small groups of insiders benefit, and NOT the general public or working classes.

    There is global excess capacity in a wide range of goods and services

    I note that this abundance and productivity is the main thing that has saved us. When these factors decline and revert to the mean someday (probably sooner than later), we are ALL in big trouble 10X.

    how about institutional players selling local and buying dollars to get into interest paying treasuries and the stock market.

    Think retirement funds who based their projected returns on positive rates. How much trouble do you think these funds are already in? And their retirees? We shall see what happens fairly soon.

    Gold is simply one of many metallic elements.
    Any other description, utility, or value is just as much an artificial human construct as any other element, compound, or device, including but not limited to dollars.

    Relativism. Say what you will about gold. Consider it an artificial human construct.

    Now, let's talk about paper contracts, paper currency, electronic payments, keystroked currency.

    Which do you think engenders the most trust, and confidence? Who do you trust to make those keystrokes?

    Q: Are You Printing Money? Bernanke: Not Literally

    I knew it would happen.
  • cohodkcohodk Posts: 15,729 ✭✭✭✭✭
    edited September 3, 2019 9:32AM

    Can i agree 10x to Higashiyama?
    I agree 5X. Note that his reasons why anyone would buy a negative bond yield highlights the fact that only certain small groups of insiders benefit, and NOT the general public or working classes

    Anyone who owns a bond mutual fund, which is just about everyone who participates in a 401k or IRA or brokerage account has benefited. Thats 10s of millions of the general public working class.

    Corporations have also refinanced at these lower rates as have millions of the general public working class refinanced their mortgages.

    And, ask the European bankers and their shareholders and employees how they have benefited from this "tribute".


    Excuses are tools of the ignorant
    Knowledge is the enemy of fear
  • jmski52jmski52 Posts: 19,721 ✭✭✭✭✭

    Anyone who owns a bond mutual fund, which is just about everyone who participates in a 401k or IRA or brokerage account has benefited. Thats 10s of millions of the general public working class.

    Owning a bond fund is financial suicide. The system is unsustainable. Pension funds are in deep trouble because they cannot fulfill their projected returns. Don't kid yourself - those 10s of millions are included in that subgroup. You are blowing smoke.

    Corporations have also refinanced at these lower rates as have millions of the general public working class refinanced their mortgages.

    Smart moves as long as the system remains intact - especially for the corporate officers with their perks & bonuses being financed by low-cost money, not so much for the millions of working class employees. That's the issue. And for how long? I note your previous remarks on the "time value of money", which implies rates sufficiently high enough to incentivize work and investment.

    What happens now to the debt burden on individuals, cities, states and the federal government, i.e. in terms of taxes and defaults when rates go back up, as they must?

    And, ask the European bankers and their shareholders and employees how they have benefited from this "tribute".

    You made my point. Who exemplifies an elitist, pampered, corrupt group more so than European bankers, their shareholders and employees? Yes, "tribute" is the exactly correct term.

    Q: Are You Printing Money? Bernanke: Not Literally

    I knew it would happen.
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