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Interest Rates: Naturally Negative?

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Re: Interest Rates: Naturally Negative?

#61

Post by gpm »

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…

I would argue that the reason is simply that physically holding cash has a negative interest rate since you have to pay for a place to keep it, people to protect it, and accept the risk that it gets damaged, lost, or stolen.

This applies whether you are a person with a wallet/mattress, or a bank with a high security vault.

Re: Interest Rates: Naturally Negative?

#62

Post by pmiller2 »

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.

That makes no sense. Rich people are precisely those people who are most able to take risks ("put [their] money to work.") Nobody has millions sitting around in bank accounts earning the risk free rate when they can afford to take risk and earn more on average.

Re: Interest Rates: Naturally Negative?

#63

Post by ErikAugust »

gpm wrote: post #61
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…

I would argue that the reason is simply that physically holding cash has a negative interest rate since you have to pay for a place to keep it, people to protect it, and accept the risk that it gets damaged, lost, or stolen. This applies whether you are a person with a wallet/mattress, or a bank with a high security vault.

Yes, and due to inflation.

Re: Interest Rates: Naturally Negative?

#64

Post by rossriley »

programmertote wrote: post #60
pbk1 wrote: post #14

Earlier quoted context omitted.

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?

Because the bond pays out at the end of the term, but you can sell it at any point of the term for whatever the market price is.

So for example let's say you bought a -0.1% yield, but newly issued bonds are now only offering a -0.5% yield you can now actually sell your bonds paying out -0.1% at a profit, since even if they paid you a 3.5% premium on the price you paid, it would still be more attractive than the rate on offer for new bonds.

Re: Interest Rates: Naturally Negative?

#65

Post by programmertote »

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.

Aside from buying physical gold at a refinery, is there a place to buy gold from the equities market? Sorry if this question sounds naive/ridiculous. If it's in my country, people would go to gold/jewelry shops and buy gold. In the US, I'm not sure if it's the case. Thank you.

Re: Interest Rates: Naturally Negative?

#66

Post by gnopgnip »

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…

It is about risk adjusted return. There is risk and costs associated with stuffing your money in a mattress, or keeping it in other kinds of accounts. Really it is the same as asking why people would buy a treasury bond instead of a CD, or junk bond that pays more in interest.

Re: Interest Rates: Naturally Negative?

#67

Post by JumpCrisscross »

darawk wrote: post #31
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, whic…

> they're legally prevented from doing so

No, they’re not. They must hold certain quantities of reserves with the Fed. But banks are free to hold the rest as cash in their vaults.

This is why many countries with negative rates still have zero deposit rates.

Re: Interest Rates: Naturally Negative?

#68

Post by scott00 »

darawk wrote: post #31
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, whic…

> 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.

Some cursory research suggests this is not the case. The Federal Reserve website states: "Depository institutions must hold reserves in the form of vault cash or deposits with Federal Reserve Banks." [0]

[0] https://www.federalreserve.gov/monetarypolicy/reservereq.htm

Re: Interest Rates: Naturally Negative?

#69

Post by acd »

I argue that centrals banks are a monopoly that artificially manipulate interest rates in the favor of banks.

Low interest rates drive up home prices as people can borrow more with the same monthly payment. High house prices hurts first time home buyers younger generations the most. Older generation do not need to loan to buy a home as much as the have enjoyed price gain on their homes.

This is a form of generation inequality. Parents who have children will have to think how the will afford home purchases with negative interest rates.

Re: Interest Rates: Naturally Negative?

#70

Post by scott00 »

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?

I don't think it's actually true. See my response to GP.
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