Germany for First Time Sells 30-Year Bonds Offering Negative Yields • Hacker News Board

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

#51

Post by DubiousPusher » Wed, Aug 21, 2019, 6:03 PM UTC

snowwrestler wrote: post #46

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…

There are dozens of answers here that explain why institutions buy sovereign debt, in general. What those comments don't explain is why anyone would buy this particular sovereign debt. So: why would anyone buy negative-interest-rate German bonds when U.S. Treasury bonds still have positive interest rates, and are available in much higher volumes?

Diversification. Spreading your money across many governments which are unlikely to default is better than putting it all in one.

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

#52

Post by hendzen » Wed, Aug 21, 2019, 6:03 PM UTC

snowwrestler wrote: post #46

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…

There are dozens of answers here that explain why institutions buy sovereign debt, in general. What those comments don't explain is why anyone would buy this particular sovereign debt. So: why would anyone buy negative-interest-rate German bonds when U.S. Treasury bonds still have positive interest rates, and are available in much higher volumes?

https://en.wikipedia.org/wiki/Interest_rate_parity

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

#53

Post by TheSoftwareGuy » Wed, Aug 21, 2019, 6:03 PM UTC

dcolkitt wrote: post #30

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 lot of financial transactions and central clearinghouses require participants to post collateral. For example if an insurance company enters into an interest rate swap with a bank, both sides will have to post some percent of the contract's notional value in escrow. This protects both sides from counterparty risk (i.e. what if the insurance company goes out of business and can't pay its side of the swap). The colla…

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.

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

#54

Post by SilasX » Wed, Aug 21, 2019, 6:04 PM UTC

dcolkitt wrote: post #30

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 lot of financial transactions and central clearinghouses require participants to post collateral. For example if an insurance company enters into an interest rate swap with a bank, both sides will have to post some percent of the contract's notional value in escrow. This protects both sides from counterparty risk (i.e. what if the insurance company goes out of business and can't pay its side of the swap). The colla…

There's no electronic cash account they can put up? If not, why not, and why can't we enable something like that so people aren't forced to buy bonds in order to hold cash?

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

#55

Post by icelancer » Wed, Aug 21, 2019, 6:05 PM UTC

sunseb wrote: post #38

Do you think it's a good idea to put some savings in gold?

If you have to ask, the answer is almost certainly "no."

There are reasons to hold commodities and precious metals like gold/silver, but they are pretty specific and for retail investors usually circle the idea of hedging against your first-party currency.

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

#56

Post by misiti3780 » Wed, Aug 21, 2019, 6:05 PM UTC

fourstar wrote: post #3

Those of you (US) with large stock/cash positions: what are you doing to weather the (inevitable) storm? Feels like we’re in the doom and gloom media phase. I suspect lots of people will start forgetting within the next 6 months in which the stock market will go sideways, until the next catalyst which is the US election cycle.

continue to put x% of my salary into vanguard ETFs, and store the rest in cash. you cannot time the market.

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

#57

Post by ryanobjc » Wed, Aug 21, 2019, 6:06 PM UTC

cameldrv wrote: post #20

whyaduck wrote: post #4

Earlier quoted context omitted.

It's cheaper than a bank vault and more secure than a home safe. I can't think of any other reason to buy them, though.

Can't banks just deposit the money as reserves with the ECB and earn zero? I suppose in the 30 year case maybe you're assuming that the ECB won't pay zero on reserves in the future, but how does that explain the short term rates?

Can they?

Most 'central banks' dont really offer banking services. Eg: you can't deposit to the federal reserve.

So the question is what to do with your money, that is both (a) easily transferable (b) auditable (c) safe

Government bonds are the traditional answers to these. They offer all of a,b,c. And until now they even offered extra money, aka interest, as bonus.

I think the best way to understand bonds is the old fashioned paper bonds. There was 2 parts: a primary part representing the money down, and a detachable 'coupon', say 5 of them for yearly interest for five years. So every year you'd bring the appropriate coupon in and get your interest. At the end, you'd get your money back which is represented by the main bond. Or more likely trade it for another bond.

All this means is the coupons now represent how much you have to PAY the government for issuing the bond. So it's more like a maintenance fee, rather than 'interest'. Or another analogy, safe deposit box fee. Bank account fees. Etc.

Money in the mattress, in physical vaults, safe deposit boxes all have the following property: (a) difficult to value (gotta count all those bills! who's doing the counting? is it auditable? did any 'shrink' somehow?) (b) costs quite a bit of money to just store ($100m is a lot of bills! it weighs a lot! it can get set on fire!) (c) not so easy to transfer.

As a result of all of the above, it's unlikely to be usable as collateral. Since the primary target is banks, they need 'liquid' assets that they can present to their auditors to prove they have reserves for their deposits.

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

#58

Post by tryitnow » Wed, Aug 21, 2019, 6:06 PM UTC

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…

This is an example of how to write a good article, I think the first sentence answers your question: "Germany sold 30-year debt at a negative yield for the first time, as investors desperate for safe assets bet that further falls in yields will boost the value of the bonds in the future."

The investors buying these bonds are simply betting that these bonds will increase in value (which will supposedly happen if central banks cut interest rates more in the future).

These bonds don't pay out for 30 years and I bet few if any of the institutions buy them intend to hold them that long, they plan to sell when the value of the bonds rise.

So why not just park that money in cash? Well let's say you have $1M and you think bond yields will continue to fall. If bond yields fall further, then the value of these bonds increase, then you can sell them and realize a return.

However, you also want to think about any way that your cash holdings could increase. Could a dollar (or euro, or whatever currency) tomorrow be worth more than a dollar today? Yes, if there's deflation then it could make sense to just hoard cash under your mattress and realize that it's purchasing power is growing!

But these investors are assuming deflation is not too much of a risk - they believe central banks will act to quickly slash interest rates - both increasing the value of these bonds and decreasing the risk of deflation.

Markets are pricing in future interest rate cuts, which is probably not a bad bet to make. Markets a probably predicting interest rate cuts because they think various economies are weakening and central banks will cut rates.

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

#59

Post by wahern » Wed, Aug 21, 2019, 6:06 PM UTC

cameldrv wrote: post #20

whyaduck wrote: post #4

Earlier quoted context omitted.

It's cheaper than a bank vault and more secure than a home safe. I can't think of any other reason to buy them, though.

Can't banks just deposit the money as reserves with the ECB and earn zero? I suppose in the 30 year case maybe you're assuming that the ECB won't pay zero on reserves in the future, but how does that explain the short term rates?

The ECB deposit rate has been negative since 2014. The role of central banks during slow growth is to coax banks to lend, not to hoard cash. When growth is high they increase deposit rates to take money out of circulation.

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

#60

Post by dmoy » Wed, Aug 21, 2019, 6:06 PM UTC

TheSoftwareGuy wrote: post #53

dcolkitt wrote: post #30

Earlier quoted context omitted.

A lot of financial transactions and central clearinghouses require participants to post collateral. For example if an insurance company enters into an interest rate swap with a bank, both sides will have to post some percent of the contract's notional value in escrow. This protects both sides from counterparty risk (i.e. what if the insurance company goes out of business and can't pay its side of the swap). The colla…

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.