there is more than $15 trillion in government debt around the world with negative yields. That means, essentially, that savers holding these bonds are paying the government to store their money.
I find this totally baffling. Why wouldn’t you rent a safe deposit box, exchange your government bonds for currency, and store the currency in the safe deposit box?
Actually, you should just invest in securities issued by the private sector, which offer higher returns and in some cases lower risk. Government debt is only risk-free as long as the consensual hallucination makes it so.
I don’t think the driving force is “savers” with the option of federally insured bank accounts or even safety deposit boxes filled with currency. The question is why would “institutions” hold government bonds with negative yields rather than currency (in electronic form). I suspect the cost of negative yield bonds is not substantially more than the cost/risk/complexity of an institution dealing with currency, especially foreign currency.
The easy answers are that storing paper currency has risks, and that some of the largest savers are required to hold a percentage of their holdings in bonds.
There is also possibly a momentum trade or fear of deflation but its harder to read that kind of thing.
The NY times recently had an article called “Safe Deposit Boxes Aren’t Safe” that is worth a read. Banks offer minimal insurance on the contents of deposit boxes. In addition, cash and other assets in safe deposit boxes can require extensive record keeping to ensure that they aren’t presumed untaxed assets if they are passed on to heirs. Finally, the carrying costs of a safe deposit box are non trivial. They cost roughly $60 annually for their smallest boxes, which are usually 3″x5″x24″. If ECB rates are −0.40 percent per year (the ECB deposit rate), then you would need more than $15,000 for this to be worth it, even if there were no risk of loss. But since there is risk of loss with cash in safes, there really may be no better solution for moving sums through time.
WSJ is gated so how much of those 15T are held by government regulated funds that are forced to buy gov debt?
another point: physical objects can be seized and private sector debt can be “bailed out” from under you if the private entity is well connected
this could be a sign of very low trust in the future
That’s what I was thinking. Lots of funds are restricted in the kinds of securities they can buy or have made commitments regarding how much of the fund will be allocated to each type of security, and it’s not a simple matter to change those things, once you’ve accepted a bunch of money from investors.
Copy the URL from Kling’s post and enter it in the search box on Archive Today.
Negative interest rates are not something new. They are something very old. They are a fee for safely storing money which is a valuable service.
If you look far enough back in history for the origins of banking it starts with goldsmiths being able to charge for storing valuables because they had the best security. Only later did they realize they could loan out a portion and pay depositors interest to leverage that business.
In a world where there is a glut of savings and a shortage of safe investments, negative interest rates are what you should expect from supply and demand. Safe deposit boxes are too inconvenient and not safe enough for big financial players.
Glut of savings and scarcity of investable opportunities is what we are having now and historically, it is an infrequent situation. Fortunately, there is an entity that is able to consume vast amount of savings and it is the government. The government’s problem is find convincing programs to separate the savers from their savings, and paying reparations to 70 million descendants of African slaves will not do. The most effective is to frighten them that we are being attacked by foreigners and spending on defense is vital. To fuel world economy, we need a good enemy, and the Russian refuse to co-operate. The Chinese only want money, are not interested in a fight. We should bribe North Korea or Iran to do something.
We must hurry now
To take a last look at the king
And launch him, lord and lavisher of rings,
On the funeral road. His royal pyre 3010
Will melt no small amount of gold:
Heaped there in the hoard, it was bought at heavy cost,
And that pile of rings he paid for at the end
With his own life will go up in flames,
Be furled in fire: treasure no follower
Will wear in his memory, nor lovely woman
Link and attach as a torque around her neck–
But often, repeatedly, in the path of exile
They shall walk bereft, bowed under woe,
Now that their leader’s laugh is silenced, 3020
High spirits quenched.
-Beowulf
Government insured liquidity cost about a half point, it is the monopoly wedge. Government enforces its monopoly, just look what happened to libra. Monopoly central banking is a cost, monetary ollice are not free. . We actually pay an ATM charge for the restrictions on our lives, and we vote to continue the practice, which is quite amazing.
More confusing is that there is a massive, highly liquid, high security bond payed out in US dollars that has averaged between 1.5% and 3% in the recent past. Why are people buying negative debt and not US debt?
Foreign buyers of American bonds have a currency risk wedge, and insurance payment which is close to 1%. Hence, when the ten year gets to low, they just by the local negative yielders. We are at that point, we have a name for it, recession.
They have a risk, but they also can have an excess profit if currencies move in their favor. The gap between US Treasuries and negative rate countries has been between 2 and 3 percentage points for most of the year. Even with a 1% annual insurance rate that gap is large for largely secure investments. Over 10 years taking a -0.5% rate instead of a 1.5% rate will leave you with 16% less money, that is a very negative view of the dollar to take vs other currencies.
re: negative interest rates (from a Forbes article)
Now on to the financial alchemy that in the short run can potentially turn negative yields into positive yields. Readers know that due to interest rate parity, a currency with a lower interest rate trades at a higher exchange rate in the future. For instance, if we look at the exchange rate for the Euro vs. USD, the one-year implied forward exchange rate (which is very much tradable as a forward or as a swap), is about 3 cents per Euro higher than the spot exchange rate (Source: Bloomberg)
The implied forward exchange rates for any pair of currencies is determined by the spot exchange rate, the differential of the money market rates for that tenor and the cross-currency basis swap, which essentially measures the demand and supply mismatch for the two currencies. For the purpose of this discussion we don’t need to understand the details of the basis swap. The only thing that the reader needs to know is that if he buys a German Bund at a negative yield of -0.25%, and then if he hedges the currency risk by selling the Euro currency forward to convert the proceeds over the hedge horizon into dollars, he is selling the forward exchange rate at a higher price than the spot exchange rate, so the difference between the forward exchange rate and the spot exchange rate can be considered additional “yield” coming from the hedge.
This forward currency hedging generates about 3%, so when we add 3% to -0.25%, we now have a negatively yielding ten year German Bund yielding +2.75% for a US investor! Similarly, a 3 month German Bund yielding -0.50% is about 2.5% hedged yield, and a two year German Bund yielding -0.67% is equivalent to a 2.30% hedged yield. On the other hand, for a Euro based investor, the act of hedging the currency risk reduces the yield of a ten year maturity Treasury note to -0.83%! In other words it converts positive US dollar yields (for a US Dollar investor) to negative yields (for a Euro investor).
A link to the full article: https://www.forbes.com/sites/vineerbhansali/2019/06/17/trading-sardines-the-case-of-currency-hedged-negative-yielding-bonds/#
Why wouldn’t you rent a safe deposit box, exchange your government bonds for currency, and store the currency in the safe deposit box?
Isn’t this itself a negative rate of return, depending on how much the rent is?
I wonder if this is driven by ratings requirements. If there’s a requirement to hold X% in AAA bonds, and these government bonds are AAA (and maybe there aren’t enough other sources of AAA bonds), then people basically have to buy them, and just eat the loss on that portion of the portfolio.
I would recommend not complaining about negative interest rates or how people invest but why this is happening?
German bunds are getting ridiculous right with the entire bonds all in the negative territory.
Are we in a HUGE Savings Glut? Is it Trump’s trade war? Is it Trump’s trade war impact on China? (more likely as this flows to Chinese commodity imports with Savings Glut) Or is something bigger in the economy that is depressing business and consumer borrowing.
Government debt is only risk-free as long as …
It’s not that government debt is risk free, it’s that if governments default our problems are probably beyond financial resolution. If you expect the government to fall, what investment would be safe? Under those conditions, even gold just makes you a target for thieves.
Our government defaults once a generation, like clock work. Not really that bad, Nixon screwed it up a little by going off gold over night, Roosevelt was a little smarter about repricing gold, to the advantage of government debt.
We dumped both the US bank one and two, each time being able to dump government debt. We will do it again. We do have a legal problem, the 1935 Supremes ruling that government debt is sacred, but we can skirt the issue with some brilliant legal theory.
Finance will go along, as on net, the result is Pareto efficient, it yields less inflation than we have ow because the next default will establish a longer term contract for Fed independence.
We have looked at this in detail, we will default about a third of the debt for one sumple reason, the millennials never did the borrowing, boomers did and they will die off. Millennials have absolutely no reason to cover the interest charges.
Defaulting is only in the younger generation’s interest if it doesn’t expect to need credit going forward (in excess of the value of interest payments). Given millennials’ policy preferences, I don’t think they plan on having balanced budgets.
Our government defaults once a generation, like clock work.
And what, pray tell, were the last three defaults? If you answer, increases in the price of gold, I will not be able to take you seriously. That is not what most people mean by “default”.
Two theories:
1) Certain people/institutions/industries may have an interest in supporting the US government’s borrowing – they are more or less paying a fee to keep funding the US government, as an entity, expecting perhaps a continuity of certain policies, or the geopolitical stability offered by the US government. Like paying a tax for Pax Americana.
2) The banking industry (perhaps some of the same people as 1) is returning the favor of the 2008 bailouts in a round-about sort of way. They’re paying the fed interest for holding onto their toxic assets in some way. I can’t claim I understand the financial alchemy, but maybe there’s a connection between the two. Historically the Fed first started this thing about setting the prime rate to a negative during the recession, right?
US interest rates are not negative. This is about European Central Bank (ECB), France, Germany, and Japan interest rates.