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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

#231

Post by tempestn »

throwaway123156 wrote: post #146
jchrisa wrote: post #130

Slightly OT but I’ve been trying to google this for a while and there are people reading this who will know where I can look: If a government (pretend US if it helps) stopped collecting taxes, and instead funded the budget by printing money every year, who would be the winners and losers compared to the current system? Where can I go to learn more?

I suppose it would lead to inflation and as long as the inflation is controlled, that's doable. Effectively, the government is being funded by all dollar holders at that point. It's a wealth tax of sorts imposed on those who hold their wealth in dollars. The idea would be that the government is being funded by the fact that $100 today, is worth only about $90 last year, and that loss in value is what's funding the go…

This might explain why the idea is more popular on one side of the political spectrum. What's interesting though is that thus far it doesn't seem like the expected inflation has been happening in the US, despite significant deficit spending. Any idea why that might be? What I've heard is a lot of, "Current levels of deficit spending are sustainable because we're not yet seeing a resulting increase in inflation." Which makes sense. But.. what's the mechanism for that? Like, taken to an extreme, if a government did indeed stop taxing and pay for everything with deficit spending, but there wasn't inflation as a result, how would that be?

The only explanations I can think of are that 1) many other countries are also doing significant deficit spending, so all major currencies are being devalued together, and so they're not actually being devalued at all, and 2) in as much as (ie) the US currency is being devalued faster than others, there are other, strengthening factors that are counteracting this. (Such as higher interest rates.)

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

#232

Post by jonathankoren »

dmoy wrote: post #202
jonathankoren wrote: post #104

Earlier quoted context omitted.

These are all concerns with paper, not “cash” as it’s commonly considered in finance. Have $xx,xxx in a checking account at a national bank. It’s a database entry, not a pallet of pennies. Furthermore, with fractional reserve banking, I sincerely doubt if there’s enough coins and bills in the country to account for the total “cash” in all the accounts, let alone all the assets. Similarly, everyone involved in these t…

Sure but then you just introduced a completely different type of risk, which is the collapse of that bank.

Bank collapse is pretty rare. Even accounting for 2008, there’s now a de facto government insurance plan for banks. i.e. Too big to fail.

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

#233

Post by wcoenen »

whatok wrote: post #180
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…

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.

This would explain negative bond rates down to -0.40%. Because if you need to park a very large amount of euros safely, banks will start to apply that rate to your deposits so it's better to get any rate that is less negative.

But curiously 10y german bund yields have recently hit -0.70%, and a couple other EU countries (France, Netherlands, Belgium) have also dipped below -0.40%.

So it must be more than the negative deposit rate. It's also the QE program which buys bonds (though it's on hold since the start of the year), and the expectation of lower deposit rates, and the expectation of more QE.

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

#234

Post by danieltillett »

docker_up wrote: post #196

Where can I put my money to take advantage of this? Gold? or just US treasuries?

Gold miners. With physical gold you have to worry about storage, but gold miners solve this problem. The gold miners have run pretty hard already, but the developers (those building a new gold mine) have not yet moved that much.

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

#235

Post by dredmorbius »

yasp wrote: post #22

If central banks weren't setting the price of credit by fiat, what would a "market" risk free rate be? Have any economists tried to answer this question? Edit: not sure why I'm being downvoted for this...?

A fair question, and there's an argument that's been made (though I'm unable to recall precisely where I ran across it, possibly in a New Books in Economics podcast) that while interest rates might once have been considered exogenous (market-determined) they are now endogenous (central-bank determined).

Which would mean that interest rates are (more or less) what CBs want them to be, at least within the bounds defined by inflation. Which presumably they want to be kept low presently.

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

#236

Post by duxup »

jedberg wrote: post #229

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, wh…

I have some visibility to a tiny community bank started by some folks and then grew into a larger bank over time. They were mostly a consumer bank (consumer banking, small business type loans, etc) with some side banking related activity.

Paradoxically (well seemingly so) the best time for them to buy or merge with other small community banks was if there was an area they wanted to be in ... that was doing well economically. That was the time to look around at the local banks that they might want to pickup, or those banks actually came to them.

Local small (usually rural / suburban) community banks would find themselves in a bad spot as the locals were doing well financially, paying off loans early, not really borrowing much, and the locals with their extra money started stuffing it into the local bank. Businesses expanded, but they were able to do so with short term or very limited loans.

The local small bank found itself flush with cash, and nobody who wanted it (well not nobody but you get it). That was the time for the other bank to swoop in and save them as they could provide a larger regional reach (and some side businesses that benefited from being backed by all that cash) to areas that still wanted that money for loans.

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

#238

Post by nabla9 »

arez wrote: post #221
nabla9 wrote: post #212

Earlier quoted context omitted.

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

Indeed. 500€ bill was known as "Bin Laden" because it was so hard to find one. It was estimated that 90% of the bills were held by drug dealers, money launderers and other criminals.

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

#239

Post by kovek »

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…

A lot of commentators are discussing the drawdowns of storing cash bills. However, who buys bonds by paying with physical cash bills? Most of us have a number in our bank account that reflects some sort of wealth? (Ownership of a security elsewhere or an I Owe You?) People with a salary directly deposited and big companies do not need a bank to store their physical cash bills.

I’m still trying to understand how this all happened.

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

#240

Post by whatok »

wcoenen wrote: post #233
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.

This would explain negative bond rates down to -0.40%. Because if you need to park a very large amount of euros safely, banks will start to apply that rate to your deposits so it's better to get any rate that is less negative. But curiously 10y german bund yields have recently hit -0.70%, and a couple other EU countries (France, Netherlands, Belgium) have also dipped below -0.40%. So it must be more than the negative…

I agree with all of this and probably could have phrased my original post better. My main point is that none of this is really possible without ECB rates being set where they are. Successful monetary policy requires multiple tools to be utilized and the deposit rate is the main tool that anchors everything else. QE in itself does not mean rates are going to be lower. You need central bank rates to also be low in order to have lower government rates. Rates didn't suddenly skyrocket after the ECB announced the end of QE.
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