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Interest Rates: Naturally Negative?

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Re: Interest Rates: Naturally Negative?

#51

Post by lbotos »

krastanov wrote: post #43
darawk wrote: post #31

Earlier quoted context omitted.

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, whic…

This is fascinating news to me! Could you elaborate on how (legislatively) the banks are required to keep their reserves with the Fed? What would be a good source to read more? How does what you said mesh with the notion that keeping cash might be riskier / more cumbersome than investing in the "risk-free" treasury bonds?

Not GP, but at someone else on HN's suggestion, I've been following Khan Academy's banking course: https://www.khanacademy.org/economics-finance-domain/core-fi...

Re: Interest Rates: Naturally Negative?

#52

Post by outworlder »

eigenvalue wrote: post #44
gst wrote: post #18

Earlier quoted context omitted.

> 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. Due to the low interest rates German insurance companies are already considering to store cash in their own vaults instead of buying bonds: https://translate.google.com/tr…

My guess is that these analyses by insurance companies don't properly take into account the risk of theft. All that cash in a bunker makes a very appealing target for thieves, both insiders and outsiders. Also, if it starts happening with any frequency, the central banks will just forbid hording of cash (e.g., by refusing to allow member banks to provide the cash if it exceeds a certain amount).

> My guess is that these analyses by insurance companies don't properly take into account the risk of theft.

So your guess is that insurance companies, companies for which their entire business model revolves around risk management, are not taking into account something as mundane as risk of theft?

That's a... curious line of reasoning.

Re: Interest Rates: Naturally Negative?

#53

Post by outworlder »

kitten_smuggler wrote: post #37
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.

> Bitcoin and gold imo

Bitcoin makes zero sense as an investment. Doubly so during a recession.

Re: Interest Rates: Naturally Negative?

#54

Post by everybodyknows »

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.

If in the U.S., buy your $10k quota of Savings Bond, Series I: Pays at least the CPI-U inflation rate, liquid after one year, favorable tax treatment, highly convenient.

https://treasurydirect.gov/indiv/research/indepth/ibonds/res...

Re: Interest Rates: Naturally Negative?

#55

Post by ac29 »

everybodyknows wrote: post #54
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.

If in the U.S., buy your $10k quota of Savings Bond, Series I: Pays at least the CPI-U inflation rate, liquid after one year, favorable tax treatment, highly convenient. https://treasurydirect.gov/indiv/research/indepth/ibonds/res...

At least at the moment, it would seemingly make more sense to invest in 1-year treasury bonds. The interest rate is higher, they are more liquid, they are more convenient to buy and sell, and they are taxed the same as I-bonds.

There's also no limit to the amount you can buy.

Re: Interest Rates: Naturally Negative?

#57

Post by darawk »

krastanov wrote: post #43
darawk wrote: post #31

Earlier quoted context omitted.

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, whic…

This is fascinating news to me! Could you elaborate on how (legislatively) the banks are required to keep their reserves with the Fed? What would be a good source to read more? How does what you said mesh with the notion that keeping cash might be riskier / more cumbersome than investing in the "risk-free" treasury bonds?

Sure: https://en.wikipedia.org/wiki/Excess_reserves

Banks are required by law to keep a portion of their assets on deposit in reserve. So if a bank has say, 1 billion in deposits, they might be required to maintain a balance with the Fed of 100 million.

What I think you're asking though is "why don't they just not keep the cash at the federal reserve". And the answer is that that's just not a thing you can do. Your bank maintains an account with the Fed - that's how it actually "stores" money. It can also physically store cash, but that comes with carrying costs (protecting it, etc.). Those carrying costs are one form of a negative interest rate.

At the end of the day, someone is storing the money somewhere. And the root-level money storer in the economy is the Fed. If the Fed wants to charge you 0.5%/year to store your money, what are your alternatives? You could keep physical cash. But then you have to protect it. You could invest in other assets, like stocks/bonds/mortgages, but those have risks. If you can't find any investments you like, and you don't want to physically store the cash, you don't really have any other choice.

Re: Interest Rates: Naturally Negative?

#58

Post by Izkata »

outworlder wrote: post #53
kitten_smuggler wrote: post #37

Earlier quoted context omitted.

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

> Bitcoin and gold imo Bitcoin makes zero sense as an investment. Doubly so during a recession.

On that second point, we don't know that yet. It didn't exist during the last recession, so it's still a guess as to what'll happen.

Re: Interest Rates: Naturally Negative?

#59

Post by pmorici »

bryanlarsen wrote: post #56

Risk free interest has been called "welfare for rich people", money for nothing. You shouldn't expect a return unless you put your money to work.

I'd be interested to see what percentage of government bonds are owned by pension funds and other middle class type retirement funds vs how much is held by the wealthy.

Re: Interest Rates: Naturally Negative?

#60

Post by programmertote »

pbk1 wrote: post #14
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…

If I expected interest rates to go even more negative, buying a negative yielding bond in anticipation of a capital gain is a rational trade. Also banks and certain investors are mandated to purchase debt with certain ratings - in the absence of positive-yielding appropriately rated bonds they have no choice but to accept the negative yield.

Could you elaborate on this a bit more? How could one gain anything from buying negative yielding bond?
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