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Germany for First Time Sells 30-Year Bonds Offering Negative Yields

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Re: Germany for First Time Sells 30-Year Bonds Offering Negative Yields

#151

Post by waqf »

unreal37 wrote: post #141
nostrademons wrote: post #126

Earlier quoted context omitted.

The implication then is that we're in a bond bubble. When you're buying something that you know has negative fundamental returns on the assumption that someone will buy it from you at a higher price, that's the definition of a bubble. And like many bubbles, it's entirely possible they'll be right in the short term, but it's basically guaranteed that they'll be wrong in the long term. You know exactly what a bond will…

Expecting the price of something to rise in the future is not the definition of a bubble. When people were selling houses in Detroit at the bottom of the housing crisis for $1000, the people buying them were expecting the value to rise in the future. It's almost like profiting off of fear not greed.

GP didn't say that a bubble is expecting the price of something to rise, they said that a bubble is expecting the price of something with negative fundamental returns to rise.

Re: Germany for First Time Sells 30-Year Bonds Offering Negative Yields

#152

Post by nostrademons »

unreal37 wrote: post #141
nostrademons wrote: post #126

Earlier quoted context omitted.

The implication then is that we're in a bond bubble. When you're buying something that you know has negative fundamental returns on the assumption that someone will buy it from you at a higher price, that's the definition of a bubble. And like many bubbles, it's entirely possible they'll be right in the short term, but it's basically guaranteed that they'll be wrong in the long term. You know exactly what a bond will…

Expecting the price of something to rise in the future is not the definition of a bubble. When people were selling houses in Detroit at the bottom of the housing crisis for $1000, the people buying them were expecting the value to rise in the future. It's almost like profiting off of fear not greed.

Expecting the price to rise when you know the underlying fundamentals don't support that price is the definition of a bubble.

People buying houses in Detroit have an investment thesis that there will still be people living in Detroit and they will still need houses, and even more broadly, that there will be more people needing more houses than there were at the bottom of the housing crisis. They may be right or wrong, but there's still a thesis based on fundamentals.

People buying unbuilt houses in the middle of the Everglades [1] because they heard of prices doubling or tripling within a year is speculation, and many of those areas still have not regained the value that investors paid for them, almost 100 years later, and probably never will.

[1] http://www.thebubblebubble.com/florida-property-bubble/

Re: Germany for First Time Sells 30-Year Bonds Offering Negative Yields

#153

Post by whatok »

TheSoftwareGuy wrote: post #2

I feel like I still don't understand negative yields, despite really trying to. Negative yields means that I put in $X (or euro/whatever germany is using) and I later am guarenteed no more than $Y out of the exchange, where Y < X. I am literally guaranteed to lose money. I could just hold on to my money, "keep it under my mattress" and still make a better ROI than bonds with negative yields. Why would anybody buy the…

A majority of institutional investors have investment mandates which limit them in the amount of cash they can hold. Additionally, if you think there's no chance of EU inflation going forward, even if these are negative yielding securities, you will still have a price return on these.

30yr Bunds were yielding 0.875% at the beginning of the year and have recently gone negative. If you were benchmarked against them and at the beginning of the year decided to either move to cash or short them, you more than likely lost your job.

Re: Germany for First Time Sells 30-Year Bonds Offering Negative Yields

#154

Post by robocat »

nostromo wrote: post #35

This is the real reason the US yield curve looks the way it does. All other developed countries are selling negative or near zero government bonds. This has lead to huge international demand for US 30 year treasuries. https://tradingeconomics.com/bonds US treasuries are giving a greater yield than Italy or Spain for reference. Of course there will be huge demand. Central banks are no longer islands. They are part of…

Alternatively investors holding USD may believe that EUR will strengthen against USD over 30 years by more than:

0.5% + US_30year_treasury_bond_rate + risk_adjustment

A negative interest rate is fine for US investors if you think the exchange rate will shift enough in your favour to cover your costs.

Re: Germany for First Time Sells 30-Year Bonds Offering Negative Yields

#155

Post by apo »

For those wondering why anyone would buy such a thing, consider:

- Many financial institutions are required to hold a certain percent of portfolio in safe assets. German bunds are among the safest in the world.

- A holder of a bond earns a capital gain (bond goes up in price) when interest rates fall. In that sense, zero is no limit at all because there can always be a buyer willing to accept an even lower (more negative) yield.

- Bond investors are well-aware of the two points above. When they sense that interest rates and/or inflation are headed lower, they know they can profit by buying, regardless of yield.

- Anticipated rate of inflation matters a lot because investors seeking return through yield focus on real interest rates (nominal rate - inflation). Inflation can be negative as well (deflation). If inflation is lower (more negative) than the bond's nominal return, that's a real positive yield. And that positive yield is locked in for the term of the bond, which in the case of the story is 30 years.

- The European Central Bank has repeatedly signaled its belief that zero is no barrier and that negative yields will be tolerated indefinitely. The ECB stands ready for quantitative easing (QE), in which the central bank buys bonds with money it creates from thin air. Investors know this and this compounds the incentive to pile on and buy bonds to enjoy the capital gains (and real returns if the investor believes that deflation is inevitable).

It's likely that all these factors combine to create the current environment. How long all of this can continue is anybody's guess because the situation is without precedent.

It's as if the financial crisis of 2008 was never resolved - just papered over through massive central bank purchases of treasuries and stocks (Japan's central bank owns a major fraction of the value of the Japanese stock market at this point).

Re: Germany for First Time Sells 30-Year Bonds Offering Negative Yields

#156

Post by f00zz »

rchaud wrote: post #116
f00zz wrote: post #95

Earlier quoted context omitted.

People who bought the Nikkei index in the early 1990s are still waiting for the correction to end...

Good point. The Japan case is a weird one. There's a Paul Krugman essay from the '90s that argues it's partially due to a historically high savings rate among Japanese consumers[0]. A good chunk of their boom was export-driven after all. Loosening monetary policy to fight deflationary pressure in the '90s also didn't seem to work because interest rates were already near zero. I think the US is different because the b…

Interestingly, it could also be argued that the breakneck economic growth that some Asian countries went through (in the case of Japan, at least until the 1990s) can be partially attributed to their high savings rate. [0]

[0]: https://en.wikipedia.org/wiki/Harrod%E2%80%93Domar_model

Re: Germany for First Time Sells 30-Year Bonds Offering Negative Yields

#157

Post by [deleted] »

secabeen wrote: post #122
SilasX wrote: post #110

Earlier quoted context omitted.

Why is everyone responding to the question under the same misinterpretation, that it means "cash" as in "physical banknotes" rather than "electronic Euros"? I know the principle of charity is hard sometimes, but come on.

Because a bank can go under, and you can lose your money in excess of the insured amount.

[deleted]

Re: Germany for First Time Sells 30-Year Bonds Offering Negative Yields

#158

Post by mdemare »

SilasX wrote: post #125
secabeen wrote: post #122

Earlier quoted context omitted.

Because a bank can go under, and you can lose your money in excess of the insured amount.

Not if it's a bank that specifically caters to this crowd and doesn't take any of the normal risks associated with lending.

Excellent question. There is a company, The Narrow Bank, that has the same idea, but they didn’t get a banking license from the Fed. Matt Levine, whose newsletter you should clearly start reading, has the details: https://www.bloomberg.com/opinion/articles/2018-09-06/fed-re...

Re: Germany for First Time Sells 30-Year Bonds Offering Negative Yields

#159

Post by hogFeast »

TheSoftwareGuy wrote: post #2

I feel like I still don't understand negative yields, despite really trying to. Negative yields means that I put in $X (or euro/whatever germany is using) and I later am guarenteed no more than $Y out of the exchange, where Y < X. I am literally guaranteed to lose money. I could just hold on to my money, "keep it under my mattress" and still make a better ROI than bonds with negative yields. Why would anybody buy the…

If it makes you feel any better, central banks don't either.

Your question is actually fairly straightforward: people own these bonds because they have to. Most countries have regulations that force institutions to own these securities.

The more important question is actually: if you are a bank, what do you do now? You have to pay to lend money to people, it costs you 1%/year to just keep the lights on.

In Japan, most banks are (again) effectively insolvent. Germany is moving that way...and yes, the "point" of this action (according to central bankers) was to support banks...but it will likely end in most banks in affected countries going out of business.

...but don't worry, the central bankers will produce a brand new plan compose of intricate theories that clearly show how intelligent they are and how this totally wasn't their fault.

Re: Germany for First Time Sells 30-Year Bonds Offering Negative Yields

#160

Post by [deleted] »

TheSoftwareGuy wrote: post #2

I feel like I still don't understand negative yields, despite really trying to. Negative yields means that I put in $X (or euro/whatever germany is using) and I later am guarenteed no more than $Y out of the exchange, where Y < X. I am literally guaranteed to lose money. I could just hold on to my money, "keep it under my mattress" and still make a better ROI than bonds with negative yields. Why would anybody buy the…

[deleted]
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