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Interest Rates: Naturally Negative?

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Re: Interest Rates: Naturally Negative?

#31

Post by darawk »

opportune wrote: post #2

I understand why you would want to set interest rates negative if your central bank is going to buy up all that debt, but as an individual or institutional investor why would you ever want to hold something with negative interest instead of cash? Why is there even a market for a bond with negative interest rates at all, since compared to a $X bond with negative interest, $X in currency seemingly carries less risk, mo…

When you deposit your money at the bank, the bank pays you an interest rate. Normally that rate is positive. They pay you that interest rate because they are investing your money somewhere (often in mortgages, which pay them an interest rate).

However, sometimes they have more money than their investment prospects can handle. Normally under those circumstances, they would buy treasuries from the federal reserve, which return the "risk-free rate". They always want to invest their money in things that return more than the risk-free rate, but sometimes they can't find enough stuff to invest in that they think will have a better return. In those cases, they're forced to buy treasuries.

Now, if the risk-free rate is negative, you might reasonably ask: Why doesn't the bank just keep cash? And the answer to that is that they're legally prevented from doing so. Banks have to maintain their capital reserves at the Fed, and the Fed pays them the "federal funds rate" on those reserves. So if they can't lend out the capital, they have to keep it with the Fed, where it earns whatever rate the Fed chooses to give them.

Re: Interest Rates: Naturally Negative?

#32

Post by simplecomplex »

opportune wrote: post #2

I understand why you would want to set interest rates negative if your central bank is going to buy up all that debt, but as an individual or institutional investor why would you ever want to hold something with negative interest instead of cash? Why is there even a market for a bond with negative interest rates at all, since compared to a $X bond with negative interest, $X in currency seemingly carries less risk, mo…

There’s a market because a -1% rate is a better return on capital than -2%. You’re assuming people are choosing negative rates over positive. Even if bonds are negative investors may have no choice, it’s a better rate than letting the cash sit there.

Re: Interest Rates: Naturally Negative?

#33

Post by worldvoyageur »

Negative interest on wealth is the historic norm for people who have a lot of it. Think storage costs for gold, guards (and maintenance) for your palace, or your yacht - not to mention the crazy depreciation.

For the ultra rich, 50 basis points of holding costs would arguably be a bargain. Even normally wealthy people don't hesitate to pay 200 basis points for their wealth to be managed in, for instance, mutual funds.

https://twitter.com/TheStalwart/status/1155840864146661378

Re: Interest Rates: Naturally Negative?

#34

Post by kbenne »

seiferteric wrote: post #23
perfunctory wrote: post #19

Earlier quoted context omitted.

Invest in reducing your energy bill if you haven't done so yet. solar plus storage plus house isolation. Should also raise the value of the house. In theory.

Can you or anyone recommend a unbiased solar ROI calculator? I have been looking for something, bu every site that I find is trying to sell me solar, so it's not too unbiased. I already have a couple quotes, and I know roughly what my rates will be, so I should be able to plug all the numbers into something to find out what % ROI I will get.

For the production side of the calculation, take a look at the National Renewable Energy Laboratory's PVWatts tool. Most of the installers build their ROI tools on top of this. https://pvwatts.nrel.gov

Re: Interest Rates: Naturally Negative?

#35

Post by samsonradu »

all_blue_chucks wrote: post #16
xchaotic wrote: post #12

Obviously this article shows up when the negative rates are already here, with the benefit of hindsight. What I am more interested in at this point is what is a good, safe alternative for a small time investor who’s already overweight on equities and housing. Bonds used to be the sensible pillar that worked at times when stock market crashed and now it doesn’t really make sense to use them for a small guy.

It's only government bonds that go negative. Corporate bonds will always provide a positive yield.

Well one has to consider that it's pretty much the same big pool of money chasing both. This money pool thinks that German 10Y yield should be around -0.60%, while the Italian 10Y yields a juicy 1.62%. That says quite a bit about the future solvency issues around Italy.

Bottom line is that if there are still positive yielding bonds in a market dominated by negatives (we're not yet there) the risk of default is priced in.

Re: Interest Rates: Naturally Negative?

#36

Post by opportune »

xchaotic wrote: post #12

Obviously this article shows up when the negative rates are already here, with the benefit of hindsight. What I am more interested in at this point is what is a good, safe alternative for a small time investor who’s already overweight on equities and housing. Bonds used to be the sensible pillar that worked at times when stock market crashed and now it doesn’t really make sense to use them for a small guy.

Not sure what your criteria for "good, safe" is but if you're interested in similar asset classes:

Government bonds in foreign currencies. Of course this exposes you to whatever that country does with their central bank and to foreign exchange rates.

Corporate bonds, obviously riskier than government bonds but at least you can get positive interest rates in your preferred currency

Preferred stock, which are similar to bonds. Before you invest in these, make sure you know how they work. They can be called back by the issuer

Other asset classes which are less safe but could help you diversify: crypto, commodities and precious metals, collector's items and art, foreign currencies. Wouldn't really recommend putting too much money in this

Re: Interest Rates: Naturally Negative?

#37

Post by kitten_smuggler »

xchaotic wrote: post #12

Obviously this article shows up when the negative rates are already here, with the benefit of hindsight. What I am more interested in at this point is what is a good, safe alternative for a small time investor who’s already overweight on equities and housing. Bonds used to be the sensible pillar that worked at times when stock market crashed and now it doesn’t really make sense to use them for a small guy.

Bitcoin and gold imo, in addition to a balanced portfolio of stocks, bonds and real estate.

Re: Interest Rates: Naturally Negative?

#38

Post by toomuchtodo »

refurb wrote: post #26
wefarrell wrote: post #6

Earlier quoted context omitted.

It makes no sense for an individual, since you can keep your money in an FDIC insured account and earn a positive interest rate. Institutions don't have that luxury - the government doesn't insure large amounts of cash. If they keep it in a bank and the bank goes under, they lose their money. So they keep their money in national governments, which are far safer than banks.

If you’re an individual with a lot of cash that would be a pain to split up into accounts with less than the FDIC insured limit, then a negative interest rate might be attractive.

While true, cash management accounts that'll insure up to $1.5 million in cash across many underlying banks is now a commodity offering (Fidelity, SoFI, Personal Capital, to name a few). As an individual, it's rare you're keeping more than that liquid.

Re: Interest Rates: Naturally Negative?

#39

Post by AnimalMuppet »

DennisP wrote: post #20
opportune wrote: post #2

I understand why you would want to set interest rates negative if your central bank is going to buy up all that debt, but as an individual or institutional investor why would you ever want to hold something with negative interest instead of cash? Why is there even a market for a bond with negative interest rates at all, since compared to a $X bond with negative interest, $X in currency seemingly carries less risk, mo…

Because if interest rates drop even lower, you can get capital gains on your bonds, especially if there's a lot of time left before they mature. https://portfoliocharts.com/2019/05/27/high-profits-at-low-r...

If.

I have a hard time seeing interest rates continuing to drop, however. (On the other hand, I never thought I'd see them this low. But they can't keep going lower forever... can they?)

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