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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

#191

Post by blawson »

logicallee wrote: post #186
apo wrote: post #155

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 nega…

>- Many financial institutions are required to hold a certain percent of portfolio in safe assets. German bunds are among the safest in the world. Can you explain how this can possibly beat cash? If I say to you "I'll let you pay me ten cents to hold onto your $100 bill for a while, and give you a paper showing the obligation to repay your $100" (the meaning of a negative yield bond), how can the offer to let you pay…

Maybe at certain sums much larger than individual depositors concern themselves with, you can't just "hold the cash".

Like banks might say there is no way we want your $10 billion in cash to look after. Either invest it yourself or pay us to invest it for you.

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

#192

Post by auntienomen »

logicallee wrote: post #186
apo wrote: post #155

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 nega…

>- Many financial institutions are required to hold a certain percent of portfolio in safe assets. German bunds are among the safest in the world. Can you explain how this can possibly beat cash? If I say to you "I'll let you pay me ten cents to hold onto your $100 bill for a while, and give you a paper showing the obligation to repay your $100" (the meaning of a negative yield bond), how can the offer to let you pay…

The world is different when you're dealing with really large amounts of cash. You can't just store it yourself; your mattress isn't big enough. And if you ask a bank to store it for you, the bank will charge you for the service. (Banks that work in this line of business are known as 'custodian banks'.) Consequently, the effective interest rate on cash for large amounts of cash can be negative.

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

#193

Post by whatok »

logicallee wrote: post #186
apo wrote: post #155

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 nega…

>- Many financial institutions are required to hold a certain percent of portfolio in safe assets. German bunds are among the safest in the world. Can you explain how this can possibly beat cash? If I say to you "I'll let you pay me ten cents to hold onto your $100 bill for a while, and give you a paper showing the obligation to repay your $100" (the meaning of a negative yield bond), how can the offer to let you pay…

You can argue safety (bonds you have sovereign default risk vs cash will have bank credit risk) but your math is not incorporating how a transaction in this case would actually take place. It's not as simple as just holding onto $100. You have a deposit rate of -0.40% at the ECB. So instead of -0.40%, you settle for -0.14% which is what these newly issued Bunds are yielding.

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

#194

Post by Mvhsz »

boxy310 wrote: post #150
Mvhsz wrote: post #112

Earlier quoted context omitted.

That makes sense but I have a follow up question. What forces this? For example, what's to stop a single entity from reaping the rewards of using cash while everyone else buys bonds to keep the economy moving. Is it a government regulation? an agreement between large institutions? or are the gains to each individual entity large enough that the negative yield is worth it?

Cash or a bank demand account is not without their own inherent risks. A fire, robbery, or forced currency exchange could destroy the value of the physical commodity of cash, and the FDIC only insures individual account bank deposits up to a certain limit so a bank institution failure could cause losses to individual accounts.

Ok you're arguing that there is no such thing as a liquid store of value that that offers a better return than a negative yield government bond?

So let's say I'm a bank with a stack of 1B in high denomination central bank notes. I calculate the rate of return as zero minus the annual cost of securing those and the annual risk that they are stolen or destroyed. Inflation isn't a factor because the bond is in the same currency. Based on your explanation that rate of return will be lower than the -0.11% that I would get from a german 30 year bond today. And there's simply nothing I can exchange those central bank notes for that would do any better than the bond.

Like OP I've never understood negative yield debt and I'm trying really hard to.

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

#195

Post by toast0 »

logicallee wrote: post #186
apo wrote: post #155

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 nega…

>- Many financial institutions are required to hold a certain percent of portfolio in safe assets. German bunds are among the safest in the world. Can you explain how this can possibly beat cash? If I say to you "I'll let you pay me ten cents to hold onto your $100 bill for a while, and give you a paper showing the obligation to repay your $100" (the meaning of a negative yield bond), how can the offer to let you pay…

Holding cash usually means putting it in a bank account. The banks are going to put a significant portion in their country's central bank; the European central bank and member central banks are currently charging banks to store money; at large balances, those banks will charge customers.

Now, you could put cash into a USD account at a US bank, where interest is still currently positive, but if you were storing Euros, you now have currency risk and jurisdiction risk. Negative rate German bonds have less risk than that.

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

#197

Post by czbond »

notJim wrote: post #111
twoheadedboy wrote: post #62

Earlier quoted context omitted.

Yeah I get that. What about for people like me who are trying to enter the market? I'm wondering if it's worth it to wait and see, or if I should just not worry too much and invest now anyway.

Time in market beats timing the market.

True, but time in market with educated and not naive timing beats "time in market". Edit: "naive", and that I simply mean to time ETF payments with awareness and possibly technical indicators.

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

#199

Post by joncrane »

dmoy wrote: post #60
TheSoftwareGuy wrote: post #53

Earlier quoted context omitted.

Why would a derivatives exchange not accept cash? what are people buying those derivatives with? Furthermore, how could any bond (or anything at all for that matter) be less risky than cash? the market value of a bond may change over time but $1 will always be worth $1. Inflation may change the purchasing power of that dollar but then the exact same mechanism will effect the bonds as well.

Cash has risks: * risk of physical destruction * risk of physical theft * risk of forgery etc etc There's some nonzero cost to accept, handle, vet, store, etc for cash. That's not even including if there are extra reporting laws or other for large amounts of cash, which just adds to the overhead.

and this is exactly why there is a market for negative yield bonds.

The true decision point isn't 0%. It's the rate for the risk/cost of holding cash.

BTW has there been any research toward what this rate actually is?

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

#200

Post by nostromo »

TheHegemon wrote: post #185
nostromo wrote: post #43

Earlier quoted context omitted.

As part of a portfolio you hold for decades? Sure. Otherwise? No. https://en.wikipedia.org/wiki/Modern_portfolio_theory

No, gold has not outperformed even cash in the last 30 years. It is only worth it if you can time it precisely: https://www.macrotrends.net/1333/historical-gold-prices-100-...

Read and understand the link I posted.

The point of holding gold isn't to increase your returns, but to reduce the volatility of a diversified portfolio.

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