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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

#221

Post by arez »

nabla9 wrote: post #212
logicallee wrote: post #186

Earlier quoted context omitted.

>- 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…

Cash is universally considered the most liquid asset because it can most quickly and easily be converted into other assets. If the amount of physical cash is huge however, say 1 billion euros, it can be less liquid than German government bonds. There is cost of moving, counting, securing it and significant delay for buying and selling. If you try to buy something for 1 billion EUR in cash, it might cost 100k EUR to d…

the ECB also removed the 500€ bill, so the cost of storing cash went up, because you need greater storage, at least that was a theory that I heard

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

#222

Post by arez »

noah_greeen wrote: post #208
logicallee wrote: post #186

Earlier quoted context omitted.

>- 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…

As some people already mentioned, the problem is the amount of cash you would have to keep safe somewhere. As far as I know, there are companies that use tunnels in mountains to act as huge cash depots. But such a storage also comes at a price. Also to prevent this kind of business, the European Central Bank already considered dismissing the 500 Euro bill. With that the physical amount to store would be even bigger.…

the 500€ bill is already not produced anymore

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

#223

Post by a_f »

lixtra wrote: post #132
gzu wrote: post #27

I’m starting to entertain the idea of a massive bubble in bonds. Is inflation really never going to show again? I can’t understand why anyone would want to hold a fiat currency for 30 years for no return. Is it due to portfolio theory where the assumption is stocks and bonds yields have inverse correlation and the way to manage risk is to have a correct ratio? Due to global QE there is too much money floating without…

I think ECB is doing a terrible job in reaching their stated goal of 2% inflation. I think actual helicopter money distributed equally to each EU citizen (a few hundred EUR) would have been much better than buying state bonds. Most people would have spent the money immediately and thus caused the desired inflation. As it is now the states benefit from QE in the first step, used in questionable projects in the second…

I too am starting to believe helicopter money could be a potential solution. Although I have to say my understanding of economics is pretty limited

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

#224

Post by jnordwick »

whatok wrote: post #148
jnordwick wrote: post #120

So it is a zero coupon bond sold above par, but this doesn't mean the bank isn't making money off of it. There are a lot of technical reasons that these can be purchased (such as a tax advantaged stutus or a requirement to hold certain duration on a portfolio). I'm an expert on German bond market, but I expect the actual yield to be positive after taking into account other factors (or there being some regulatory reas…

I'm looking at the bond on Bloomberg right now and it's showing a yield of -0.14% with a price of EUR104.54. All things equal, if you buy this bond right now and hold it to maturity, that will be your yield. This is an after-tax yield. I'm not sure what bank you are referring to in the first sentence. These are bonds issued by the country.

Any after tax yield is going to be an estimate. i no longer have access to a bloomberg login, but does it give its methodology? @ 104.54, YTM would be -0.44 not taking other factors into account. There could also be technical reasons such as collateral requirements or other banking/trading requirements.

> I'm not sure what bank you are referring to in the first sentence. These are bonds issued by the country.

The purchasing institutions, not the issuing. These mostly banks aren't just giving money away, and they don't really have costs associated with carrying base money since they can just ship cash back to the central bank for reserve credit, i assume under most conditions.

And the can always go elsewhere in the eurozone for yield, but they seem to need bunds for particular reason. not sure, i just pretty sure they aren't giving money away for no reason. they could even lay off currency risk and go for US Tsy.

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

#225

Post by YawningAngel »

Mvhsz wrote: post #194
boxy310 wrote: post #150

Earlier quoted context omitted.

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…

Arguably, the combined cost and risk of loss when you store a pile of cash in a secured cellar is greater than 11bp.

There's also the fact that bonds can appreciate, so even if on the face of it you're taking an 11bp hit that might not be true in practice.

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

#226

Post by tempestn »

toast0 wrote: post #195
logicallee wrote: post #186

Earlier quoted context omitted.

>- 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,…

Of course you could take physical cash and put it in a safe or something, but that doesn't scale well. Although maybe it does suggest a lower limit on negative interest rates, where it would actually be cheaper to store large amounts of physical cash...

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

#227

Post by whatok »

AdrianB1 wrote: post #203
whatok wrote: post #180

Earlier quoted context omitted.

Good post that covers nearly everything. The only thing I would add to this is that the ECB's deposit rate of -0.40% is the only thing that has enabled all of this.

Actually the ability of the ECB to print money out of nothing is the main enabler.

The ECB printing money is a factor in stabilizing rates but it in itself does not create conditions where governments are able to borrow for 30 years at negative rates. For example, if the deposit rate was at 3.00% instead of -0.40%, governments would not be able to issue at negative yields; QE or no QE. Additionally, the ECB stopped net QE purchases at the beginning of the year and negative rates are still a thing.

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

#229

Post by jedberg »

The best explanation I've heard for negative rates is this:

Imagine you have a million dollars worth of cars. If you want to store that in a bank, you'd pay them money to do so. Why? Because the car has no value to the bank. The only thing they can do is store it in the vault, which requires security personnel, space, climate control, etc.

Now instead you have a million dollars in cash. In the current environment, where more people want to put money into the bank than take it out, the cash also has no value to the bank. They can't loan it out again because no one wants to borrow that much. So they charge you for storing your money. This is how they make a profit. By slowly taking your balance, since they can't make money loaning it out.

A negative interest rate basically means more people want to save money than spend money. When the government offers negative rates, it's because they want people to spend money instead of save it. When a bank does it, it's because more people are putting money in than taking it out.

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

#230

Post by zeveb »

blackflame7000 wrote: post #188
rags2riches wrote: post #166

Earlier quoted context omitted.

If you describe negative interest rates as "forcing people to invest their money", how would you describe deflation? Money is debt. You hold something now and expect somebody else to give you something of value for it in the future. But the future is always uncertain. You may lose out on the deal by holding on to your money. But you seem to be demanding that somebody somehow should guarantee that people never do lose…

You would have to back the money with something physical such as the Gold Standard. An Oz of gold today will still be an Oz of gold tomorrow. Furthermore, the rarity of gold makes the amount in circulation relatively constant.

The problem is that the purchasing power of gold isn't relatively constant: what you can buy with 1 oz. today and what you can buy with 1 oz. tomorrow are not necessarily the same — so you have much the same problem.

Moreover, the relative constancy of the gold supply is a problem, because as the economy grows that makes each unit of gold more valuable … which leads to deflation, which is far worse than inflation, and can lead to utter economic desolation.

I hate fiat money, I really do: I hate that governments can inflate their way out of debts and inflate away my savings. But gold — appealing as it is — is even worse.

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