Negative bond yields

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BradMajors
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Negative bond yields

Post by BradMajors »

Some European and Japanese bond yields have turned negative:

http://www.ft.com/fastft/255992/bond-in ... -from-them

For example,

* 5yr German bond yields have dropped to -0.003 per cent,
* 400 billion in eurozone government debt has negative yields,
* 2yr Swiss yields have been -0.5%

If US bond yields also turn negative will people change the percentage of their funds allocated to bonds?
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White Coat Investor
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Re: Negative bond yields

Post by White Coat Investor »

WTH? What's the point of a negative nominal bond? I guess for a large investor that gets no benefit from FDIC insurance it could make sense, but I don't see why an individual investor would buy a negative nominal bond. Anyone?

I for one won't be investing in nominal bonds with a negative yield. I'll just put it in a bank account. Ally Bank is almost up to 1% these days!
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
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Re: Negative bond yields

Post by fanmail »

EmergDoc wrote:WTH? What's the point of a negative nominal bond? I guess for a large investor that gets no benefit from FDIC insurance it could make sense, but I don't see why an individual investor would buy a negative nominal bond. Anyone?

I for one won't be investing in nominal bonds with a negative yield. I'll just put it in a bank account. Ally Bank is almost up to 1% these days!
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lack_ey
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Re: Negative bond yields

Post by lack_ey »

EmergDoc wrote:WTH? What's the point of a negative nominal bond? I guess for a large investor that gets no benefit from FDIC insurance it could make sense, but I don't see why an individual investor would buy a negative nominal bond. Anyone?

I for one won't be investing in nominal bonds with a negative yield. I'll just put it in a bank account. Ally Bank is almost up to 1% these days!
Here's an NYT article from last year:
http://www.nytimes.com/2014/06/05/upsho ... 0002&abg=0

Denmark had negative 0.2% on deposit rates in part of 2012-2014.

I don't know about the differences in financial systems, banking, and such and how that would push the incentives for both individuals and institutions. The question is whether cash and other short-term holdings would actually be better or worse (or feasible?) than the negative bonds.
Johno
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Re: Negative bond yields

Post by Johno »

Right it only matters what's the best govt gteed yield you can get. US T-bill rates have dipped below zero at various times in recent 'zero rate' environment, but as long as best FDIC insured savings rates were close to 1%, it didn't matter for small retail investors. The money in T-bills is institutional which can't access FDIC insured accounts and or else retail too big to fit less than many, many accounts of less <$250k each. Likewise at least a lot of the money in negative yielding foreign bonds now.

If FDIC insured deposit or CD rates were to go uniformly below zero, and still be higher than treasury rates, that's when it would matter to more people. Actually small investors could just put paper money in a safe deposit box instead. But somewhat more substantial investors with $250k or a few times that to put in safe assets might find that impractical and have to accept negative rates.
tornasunder
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Re: Negative bond yields

Post by tornasunder »

Thanks so much for this post! I can sure understand why Hathaway and Apple and others are rushing in to sell negative interest bonds (although it sure isn't clear that they need the money), I really could not believe that anyone wants to buy these bonds. Now it is clearer; they don't! But have no choice in parking the money they have. I'm glad I don't have that problem. Go Ally! Go GE capital Bank!
Gropes & Ray
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Re: Negative bond yields

Post by Gropes & Ray »

I think they don't have deposit insurance, so if you're concerned about the risk of your bank going under, you would pay the government for a guarantee on your deposit (negative interest).
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Doc
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Re: Negative bond yields

Post by Doc »

EmergDoc wrote:WTH? What's the point of a negative nominal bond?
Collateral.

Our whole system of derivative instruments that makes our financial markets efficient are based on having a security with zero risk and very high liquidity to provide the insurance if the counterparty defaults.
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Artsdoctor
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Re: Negative bond yields

Post by Artsdoctor »

So if you're betting that bond prices will increase further, you'd be buying the bond for the capital appreciation (and not the coupon).
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Re: Negative bond yields

Post by Doc »

Artsdoctor wrote:So if you're betting that bond prices will increase further, you'd be buying the bond for the capital appreciation (and not the coupon).
Huh?

The question was "What's the point of a negative nominal bond". The answer is collateral for some other financial instrument. The return on the collateral is irrelevant. It is only the guaranty on the collateral's principle that matters.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
Tamales
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Re: Negative bond yields

Post by Tamales »

From a Feb 2015 Merrill-Lynch report:

"Zero Interest Rate Policies across the globe now support 83% of the world’s equity market capitalization.

$4.1 trillion of global debt is now negatively yielding (0% or less)."
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Re: Negative bond yields

Post by Browser »

If buying negative yield bonds was clearly seen as a bad idea by nearly everybody, they wouldn't be able to sell them, would they? Clearly that's not how they are viewed by the bond market so maybe it would be worth thinking it through. You might not like it, but that's not really the main issue is it? Bonds is bonds, and they have the same role as a financial asset in your portfolio that they always did.
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Re: Negative bond yields

Post by bigred77 »

Browser wrote:If buying negative yield bonds was clearly seen as a bad idea by nearly everybody, they wouldn't be able to sell them, would they? Clearly that's not how they are viewed by the bond market so maybe it would be worth thinking it through. You might not like it, but that's not really the main issue is it? Bonds is bonds, and they have the same role as a financial asset in your portfolio that they always did.
I disagree with this. I'm a retail investor. I have options institutional investors don't have.

I for one would sell all of my bond holdings if their yield went negative and i could find CD's, Savings Accounts, or stable value funds that a positive or 0 yield.
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Re: Negative bond yields

Post by Browser »

We don't know where we are, or where we're going -- but we're making good time.
john94549
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Re: Negative bond yields

Post by john94549 »

Were I someone in Germany with a few euros kicking around, I would change them, sooner than later, to US Dollars, send them to my nephew in Milwaukee, and have him open a five-year ladder of five-year CDs. I'd comp him for the tax. Why anyone, anywhere, pays anyone, anywhere, to hold their money is beyond me. Negative interest rates are a non-starter. Just bury the banknotes in the back yard.
bberris
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Re: Negative bond yields

Post by bberris »

Remember when banks used to charge fees for checking? Better get used to it.
A negative yield on a govt bond is the same deal. Govt bonds are the govt savings accounts. And I second the previous answer that govt bonds are needed for collateral on derivatives.
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Re: Negative bond yields

Post by Valuethinker »

john94549 wrote:Were I someone in Germany with a few euros kicking around, I would change them, sooner than later, to US Dollars, send them to my nephew in Milwaukee, and have him open a five-year ladder of five-year CDs. I'd comp him for the tax. Why anyone, anywhere, pays anyone, anywhere, to hold their money is beyond me. Negative interest rates are a non-starter. Just bury the banknotes in the back yard.
And taking on considerable USD/ EUR exchange rate risk in the process.

Around where I live, gangs with motorbikes have breaken down the doors of Asian families (ie with the bikes) to break in and steal their jewelry and valuables. Asian families are known to keep a lot of gold around the house (or believed to do so, anyways).

So we can see the problem of having large amounts of cash on your person.

Bank charges on accounts which are not paying interest are a form of negative interest rate, particularly for the small account holder.
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Re: Negative bond yields

Post by Valuethinker »

bberris wrote:Remember when banks used to charge fees for checking? Better get used to it.
A negative yield on a govt bond is the same deal. Govt bonds are the govt savings accounts. And I second the previous answer that govt bonds are needed for collateral on derivatives.
Buying Swiss Franc or German Eurozone bonds at a negative yield is also a form of foreign exchange bet. If CHF keeps rising the currency gains will outweigh the yield loss.

Also if interest rates fall *further* you will make a capital gain. So for example with QE by the ECB (driving prices of bonds up further).
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Re: Negative bond yields

Post by anil686 »

Valuethinker wrote:
bberris wrote:Remember when banks used to charge fees for checking? Better get used to it.
A negative yield on a govt bond is the same deal. Govt bonds are the govt savings accounts. And I second the previous answer that govt bonds are needed for collateral on derivatives.
Buying Swiss Franc or German Eurozone bonds at a negative yield is also a form of foreign exchange bet. If CHF keeps rising the currency gains will outweigh the yield loss.

Also if interest rates fall *further* you will make a capital gain. So for example with QE by the ECB (driving prices of bonds up further).
+1 - I believe that is what "experts" are thinking when it comes to foreign bonds IMHO... while it has a low yield - it can go lower potentially with QE and if it does it will return a cap gain. When people look at their 401K or IRA balances, they do not care if the "return" is bond interest or bond gains due to lowering rates - thus I think that is why the international bond funds were added last year and their percentages increased this year - whether or not you think that is market timing is up to you...
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Re: Negative bond yields

Post by VA_Gent »

Will it still look foolish if inflation is minus 10%? Just like all of those crazy people locking in 3% cds at PENFED last year that are now yielding 1.600%. They have lost almost half of their yield in one years time.
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Re: Negative bond yields

Post by obgyn65 »

I will keep buying 10-year CDs for the foreseeable future. I got one last week at 2.7%.
VA_Gent wrote:Will it still look foolish if inflation is minus 10%? Just like all of those crazy people locking in 3% cds at PENFED last year that are now yielding 1.600%. They have lost almost half of their yield in one years time.
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Re: Negative bond yields

Post by Artsdoctor »

Doc wrote:
Artsdoctor wrote:So if you're betting that bond prices will increase further, you'd be buying the bond for the capital appreciation (and not the coupon).
Huh?

The question was "What's the point of a negative nominal bond". The answer is collateral for some other financial instrument. The return on the collateral is irrelevant. It is only the guaranty on the collateral's principle that matters.
I don't subscribe to the idea. But buying a bond with a negative yield can certainly make you money if rates go lower and you sell the bond at a profit (when rates go lower, the price of the bond increases, as we all know). That is one point of purchasing a negative nominal bond.
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Re: Negative bond yields

Post by Doc »

Artsdoctor wrote:
Doc wrote:
Artsdoctor wrote:So if you're betting that bond prices will increase further, you'd be buying the bond for the capital appreciation (and not the coupon).
Huh?

The question was "What's the point of a negative nominal bond". The answer is collateral for some other financial instrument. The return on the collateral is irrelevant. It is only the guaranty on the collateral's principle that matters.
I don't subscribe to the idea. But buying a bond with a negative yield can certainly make you money if rates go lower and you sell the bond at a profit (when rates go lower, the price of the bond increases, as we all know). That is one point of purchasing a negative nominal bond.
Let's try again. You are thinking about making money with the bond trade. I was addressing another reason to hold the bonds. Not to make money on the bond itself but to use the bond as collateral for some derivative like an interest rate swap or a credit default swap. The money is being made or lost on the other side of the swap not on the collateral side. You and I are not going to make such a trade but bond traders do every day. And the fact that the security that is supplying the collateral for the trade has a negative yield is not a substantial factor.
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Re: Negative bond yields

Post by Johno »

Doc wrote:
Artsdoctor wrote:So if you're betting that bond prices will increase further, you'd be buying the bond for the capital appreciation (and not the coupon).
Huh?

The question was "What's the point of a negative nominal bond". The answer is collateral for some other financial instrument. The return on the collateral is irrelevant. It is only the guaranty on the collateral's principle that matters.
The party holding the collateral hands over that return, so they don't care what it is. But the party posting the collateral, the owner, gets that return and does care.

Collateral needs help explain why financial institutions don't sell very low or negative yielding bonds for riskier higher yielding bonds. Along with the general risk/return considerations, the riskier bonds might not be eligible for use as collateral or might require more over-collateralization of a given exposure.

But, collateral needs don't explain why financial institutions don't just sell negative yielding bonds for cash if they can get non-negative yield on cash. Cash is acceptable as collateral on almost any collateralized transaction, for example collateralizing derivative exposure. Medium/long term govt bonds are often used as collateral to borrow cash: repo transactions. However if the holder just sells the bond for cash they don't need to do a repo to get the cash.

Significantly negative govt bond yields tell you that banks can only get negative yields on cash and the market doesn't expect it to change soon. For example in Switzerland the SNB now charges .75% on deposits by member banks, so there is a positive carry relative to that for Swiss institutions to hold their 10 yr bond at around zero % yield (lately, was negative for a while even in that maturity). Apparently the market expects such extraordinary rate policies to persist for some time. The same is true to a lesser extent in the Eurozone where ECB charges .1% to hold member bank deposits, so it's not a given that banks would offer zero rate deposits unless they can profitably re-invest the money in their own loan or bond portfolio's. And if there's shortage of zero rate deposits, then negative bond yields are not irrational for institutions which need to hold high grade bonds *or* cash to use as collateral. Needless to say, the existence of a higher yielding govt bond in another currency isn't relevant if the institution doesn't want to take currency risk.

The case of US T-bill yields occasionally dropping below zero in last few years is a bit more puzzling at first glance since member banks earn 0.25% on excess reserves deposited at the Fed, ~$2.5tril lately, slightly off the high but compared with a few $bil pre crash. However the big US banks still have limited appetite to just take unlimited zero rate deposits and get 0.25% at the Fed. Some big banks now charge fees, effectively negative rates, on big institutional deposits at zero nominal rate. And 'the public' (including financial insts which can't deposit at the Fed) depositing money at big banks is taking some extra credit risk compared to T-bills, or the risk the member banks take to deposit at the Fed. So occasional slight negative T-bill rates aren't a big surprise in such an environment, for entities dealing in amounts where holding currency notes isn't practical (and they also have a slight negative yield including cost of safe storage), and aren't eligible or amount also too big for FDIC insured accounts paying significant positive rate.
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Re: Negative bond yields

Post by Dandy »

The problem may be that no investment bonds or FDIC pays positive interest. yikes that is a nightmare for those of us with large percentages allocated to fixed income products. You don't want to be 100% in equities but where to you go? If you knew in advance you could buy 30 year Treasuries and some 10 year CDs.
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Re: Negative bond yields

Post by Doc »

Johno wrote:The party holding the collateral hands over that return, so they don't care what it is. But the party posting the collateral, the owner, gets that return and does care.
That's the point I was inexpertly trying to make. There are other reasons for holding low yield bonds/notes/bills other than the return on the instrument itself. The holder of the collateral doesn't care about the yield. He only is concerned with the "credit" risk. The party posting the collateral cares about the yield but he needs that instrument for collateral.

Thanks for the amplification and clarification of my remarks and correct me if I am misrepresenting the idea.
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