Negative Interest Rates in U.S.

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susa
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Negative nominal rates inevitable?

Post by susa » Sat Aug 10, 2019 7:50 am

Read the following (paraphrased) sentence in multiple papers online
.. as the recession intensifies central banks will see no alternative to deeper negative nominal rates to keep their governments and banks afloat through a combination of eliminating borrowing costs and inflating bond prices.
..
..entire AAA-rated bond yield curves are likely to be forced into negative territory, following the Swiss government bond market, which is already there. The denial of time-value will mean a government bond with no final redemption date priced at less than infinity will be technically a bargain.
Banks in EU have been for a while now pricing loans, mortgages in negative terms thus paying the borrowers for home loans.

What may be the catallactic consequences ?

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Re: Negative nominal rates inevitable?

Post by JoMoney » Sat Aug 10, 2019 8:30 am

susa wrote:
Sat Aug 10, 2019 7:50 am
... Banks in EU have been for a while now pricing loans, mortgages in negative terms thus paying the borrowers for home loans...
From what I've heard/read that's not actually the case (yet). While there have been negative interest mortgages, they are initiated at a premium to the value at maturity (sort of a loan origination fee) and have ongoing administrative fees that are slightly higher than the effective interest rate, so while it's been a catchy headline, no borrowers are actually getting paid to borrow.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Negative nominal rates inevitable?

Post by susa » Sun Aug 11, 2019 6:43 am

https://www.jyskebank.dk/bolig/nyheder/ ... ativ-rente

Jyske Bank said this week that customers would now be able to take out a 10-year fixed-rate mortgage with an interest rate of -0.5%, meaning customers will pay back less than the amount they borrowed

http://cphpost.dk/news/business/busines ... nmark.html

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Negative Interest Rates in U.S.

Post by DaufuskieNate » Sun Aug 11, 2019 7:55 am

[Thread merged into here, see below. --admin LadyGeek]

Ran across this article today:

https://seekingalpha.com/article/428452 ... y-negative

Here is the summary:

"Summary
It is no longer absurd to think that the nominal yield on U.S. Treasury securities could go negative.

Along with the global secular drivers depressing interest rates, three cyclical forces pulling U.S. rates lower have recently intensified.

If the Fed cuts rates all the way back down to zero and restarts quantitative easing, negative yields on U.S. Treasuries could swiftly change from theory to reality."

While we could debate the likelihood of negative interest rates in the U.S., perhaps a more interesting discussion would be how Bogleheads would respond to such a development. Some time ago, in the face of negative real interest rates, I shifted a portion of my fixed income to alternatives. If nominal interest rates turned negative, how would you plan to respond?

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Blueskies123
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Re: Negative Interest Rates in U.S.

Post by Blueskies123 » Sun Aug 11, 2019 8:05 am

I would move some or all of my treasuries to cash and corporate bonds.

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Carlos Danger
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Re: Negative Interest Rates in U.S.

Post by Carlos Danger » Sun Aug 11, 2019 8:12 am

It's coming IMO, only a matter of time.

There's a reason Powell used the language "effective lower bound" where he and other Fed chairs once used the language "zero lower bound." And that was in public.

In private, depending on who you believe, fed members have allegedly discussed the possibility.

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Re: Negative Interest Rates in U.S.

Post by welderwannabe » Sun Aug 11, 2019 8:23 am

It depresses me.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

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Re: Negative Interest Rates in U.S.

Post by animule » Sun Aug 11, 2019 9:15 am

Pro tip - this is why I am maxing out my I-Bond and EE bond investments each year. The latter offers a average annual return of 3.5%+ if you hold the bonds for 20 years and get the automatic doubling feature. With such a high percentage of European bonds now negative, I think it is inevitable that US bonds will go in the same direction. These two Treasury Direct options look increasingly attractive given the specter of negative interest rates.

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Re: Negative Interest Rates in U.S.

Post by SimpleGift » Sun Aug 11, 2019 9:24 am

DaufuskieNate wrote:
Sun Aug 11, 2019 7:55 am
If nominal interest rates turned negative, how would you plan to respond?
A trend toward negative interest rates in the U.S. might conceivably benefit real estate investments. The idea being that the cheaper mortgages become — via negative interest rates for banks — the more real estate prices might go up as the supply of buyers with easy cash on hand increases.

Thus as a young investor, I might be more inclined to consider home ownership and possibly direct real estate investment, such as rental housing. As an older investor, who already owns a home, I might think about an increased allocation to a REIT index fund, domestic and/or international.

Today in Europe and Japan, negative rates are now thought to be boosting real estate prices (article here).
Last edited by SimpleGift on Sun Aug 11, 2019 9:29 am, edited 1 time in total.

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Re: Negative Interest Rates in U.S.

Post by nisiprius » Sun Aug 11, 2019 9:28 am

Humpfh. So for ten years all the smart people have been telling us "interest rates can only go up," and now they are all telling us "interest rates can only go negative?"

And one of the reasons the smart people gave for saying they could "only go up" in the first place was that they couldn't possibly go negative.

Meanwhile, in 2014 economists polled by Bloomberg said, unanimously, 68 out of 68, not one demurral, that the 10-year rate would go up over the next six months, and it went down. Ergo, nobody knows nothing.

I just don't get it. In 2003 the Fed rate was down to 1% and nobody was even talking about negative interest rates. 2008-2015 it was below 0.5% for seven years, I can't remember if much was said about negative rates but I don't remember anyone stressing about it. Why a sudden fear of negative interest rates now with the rate above 2%?

As to what I will do personally, I see nothing at all to be gained by trying to prepare in advance. It will happen or it won't. If it does happen, what I will do will depend on the range of choices available to me then, which is as unpredictable as anything else.

Even if short-term rates become negative, there could still be a normal yield curve and long-term rates could be positive.

Even if rates are negative, if they are falling fast enough, total return could be positive.

Saying that there exist some US bonds somewhere with negative interest rates is very different from saying that the bond funds I use--Vanguard Total Bond Index and Vanguard Inflation-Protected Securities--are doomed to inevitable, sustained negative total return.

Even if bond funds have negative total return, it could still make sense to hold them if the difference in bond and stock returns stays about the same, unless there was some obviously superior alternative to bonds as a way of stabilizing a portfolio.

Now if at some point it becomes crystal clear that FDIC-insured bank accounts were much much better than bonds, hey, I'd do the obvious and stick take my money out of bond funds and stick it in a bank. But I see no reason to do it early; oddly enough, the condition that makes it attractive--falling interest rates--is also a condition that might a little loft to bond market values, so it would might not be a bad time to sell. I don't think it will really work that way, though; negative interest rates would be a major dislocation in the financial system, and something tells me banks would react, probably by imposing humongous fees on every kind of account.
Last edited by nisiprius on Sun Aug 11, 2019 9:45 am, edited 2 times in total.
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Re: Negative Interest Rates in U.S.

Post by JoMoney » Sun Aug 11, 2019 9:46 am

The low interest rates are the clearest sign that we remain in a (global) economic recession. The U.S. has been fairing it better than most, we still have room to drop rates further before it goes negative. My prediction would be along the lines that I don't think we'll see negative rates here. My prediction would be more aggressive attempts at "helicopter money", likely involving social programs putting dollars more directly into the hands of those with higher propensity to consume, rather than the focus on trying to stimulate economic investment through even lower/negative rates.

... but even so, I would still be buying stocks with the largest part of my savings. Rather than use a bank or bonds I might keep more cash, maybe even do some spending on collectibles, durable goods, maybe even gold.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Negative Interest Rates in U.S.

Post by cableguy » Sun Aug 11, 2019 10:12 am

Its all about the currency war and trade. Rates should be going up in a strong economy with low unemployment. It will force savers to buy stocks, real estate, and risky bonds. Higher minimum wage, a weaker dollar, lower rates.....your morning cup of coffee with me $10 this time next year....

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Re: Negative Interest Rates in U.S.

Post by willthrill81 » Sun Aug 11, 2019 10:17 am

nisiprius wrote:
Sun Aug 11, 2019 9:28 am
Even if bond funds have negative total return, it could still make sense to hold them if the difference in bond and stock returns stays about the same, unless there was some obviously superior alternative to bonds as a way of stabilizing a portfolio.
CDs? Savings account?

And presumably, longer-term bonds would be less likely to have a negative yield than shorter-term bonds.
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Re: Negative Interest Rates in U.S.

Post by willthrill81 » Sun Aug 11, 2019 10:19 am

cableguy wrote:
Sun Aug 11, 2019 10:12 am
Its all about the currency war and trade. Rates should be going up in a strong economy with low unemployment. It will force savers to buy stocks, real estate, and risky bonds. Higher minimum wage, a weaker dollar, lower rates.....your morning cup of coffee with me $10 this time next year....
Many have argued that the global economy has gotten accustomed to cheap money and that moving away from that at all will induce a recession, make a recession caused by other factors worse, or both. And a lot of savers have already bought stocks, real estate, and bond with questionable credit risk.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Negative Interest Rates in U.S.

Post by TBillT » Sun Aug 11, 2019 10:22 am

Sorry to be a broken record, but Gary Shilling is the economist that gets the most credit for predicting lower TBond rates and also he leads on how to invest for that. He was saying 2% lower limit, so now I need new instructions from him, if he is going to go below 2% and how to invest. He nener mentions savings bonds or TIPS right now, because below-

Put it this way, I've made about 10% in TLT in a couple weeks....I was trying to start a TLT position on dips, now I just got one small position. I am a good market timer, but I am timid never make more than a mini-move in the right direction.

PS- Shillng was good friend with Bogle but Shilling is more trying to predict the future trends vs. Bogle approach. Both shy away from stock picking.
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Re: Negative Interest Rates in U.S.

Post by willthrill81 » Sun Aug 11, 2019 10:28 am

Those that are really concerned about negative interest rates may want to buy some long-term TIPS directly, which would currently lock-in a real return of .55% for 30 years. That would certainly leave you open to interest rate risk, but that might be worth it to some.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Negative Interest Rates in U.S.

Post by DaufuskieNate » Sun Aug 11, 2019 10:30 am

There can be value in considering alternative futures that cause one to move off of a "stay the course" path. Of course, staying the course may be the best response to negative interest rates. I just wonder how many would have the mental fortitude to reinvest at negative rates.

Negative rates could well deteriorate the value of the dollar. A possible response of central banks around the world could be to diversify the currencies used as reserves. Moving to global fixed income could also be a reasonable diversification strategy for the individual investor, even if there are negative rates in other countries.

As several have mentioned, real estate and hard assets may be in demand.

Reaching for yield seems a likely response for many. However, the likely shrinking of credit spreads call the risk/reward of this path into question.

Of course, one could also simply shorten the duration of their fixed income portfolio in the hopes that the negative rates will be a short term phenomenon. The cost of this strategy is likely high as the short end of the curve could easily have the most negative rates.

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Re: Negative Interest Rates in U.S.

Post by whodidntante » Sun Aug 11, 2019 10:37 am

A deep recession would be really horrible right now because we've shot both barrels of the traditional recession fighting gun and we forgot to reload. Lower rates tend to lead to higher asset prices and goes a long way towards explaining the boom in the stock market and bicycle pumping (wouldn't quite call it a boom) of real estate prices. But what is the goal of your tactical asset allocation? Owning more stock is rational I think if your main objective is to increase expected returns. But that would be stupid if you just want to defend what you have.

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Re: Negative Interest Rates in U.S.

Post by MoneyMarathon » Sun Aug 11, 2019 10:52 am

DaufuskieNate wrote:
Sun Aug 11, 2019 7:55 am
IIf nominal interest rates turned negative, how would you plan to respond?
For the individual saver, I-savings bonds would look pretty attractive. They are triple-protected:

(1) Principal protected. You suffer (and gain) nothing from changes in yield. No nervousness about rates rising again.

(2) Deflation protected. Quote: "If the inflation rate is so negative that it would take away more than the fixed rate, we don't let that happen. We stop at zero." Never goes negative.

(3) Inflation protected. This is its most well-known protection, but the principal protection and deflation protection are more relevant here.

The main limitation is that you can buy only so much. But that's also what makes it an interesting option for the individual, because the triple protection guarantee won't break the bank for the government as much (and is, thus, less likely to be taken away) from a rush of institutional investors looking for a safe port in a storm.

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Re: Negative Interest Rates in U.S.

Post by TaxingAccount » Sun Aug 11, 2019 11:15 am

.....
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Re: Negative Interest Rates in U.S.

Post by uberdoc » Sun Aug 11, 2019 11:25 am

I like to hide my money in VT sacks.

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Re: Negative Interest Rates in U.S.

Post by bgf » Sun Aug 11, 2019 11:32 am

if rates go to zero, then stocks are very cheap.
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Re: Negative Interest Rates in U.S.

Post by JoMoney » Sun Aug 11, 2019 11:40 am

bgf wrote:
Sun Aug 11, 2019 11:32 am
if rates go to zero, then stocks are very cheap.
:thumbsup
The big question is how long will rates remain low, and when they rise, how quickly will they rise?
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Re: Negative Interest Rates in U.S.

Post by packer16 » Sun Aug 11, 2019 11:49 am

The trends that got us here, lack of capital destroying event (war, famine & epidemic) & technological innovation, are not slowing down. The last time we had this situation the 19th century (after the Napoleonic Wars) lasted nearly 100 years & we have been in this situation since the end of the Cold War (1990s) so we have another 70 years before being longer than another cycle in history. IMO we are in the middle of this cycle but we will see.

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Re: Negative Interest Rates in U.S.

Post by Jags4186 » Sun Aug 11, 2019 11:57 am

packer16 wrote:
Sun Aug 11, 2019 11:49 am
The trends that got us here, lack of capital destroying event (war, famine & epidemic) & technological innovation, are not slowing down. The last time we had this situation the 19th century (after the Napoleonic Wars) lasted nearly 100 years & we have been in this situation since the end of the Cold War (1990s) so we have another 70 years before being longer than another cycle in history. IMO we are in the middle of this cycle but we will see.

Packer
I somewhat agree. And the next truly capital destroying war might end human civilization as we know it so I am not fearful of it (at least form the perspective of what can I do to protect myself). Any legitimate attack on US, Israeli, or East Asian soil would likely result in such an overwhelming response it would set off a movie/video game level of world destruction.

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Re: Negative Interest Rates in U.S.

Post by Smoke » Sun Aug 11, 2019 12:00 pm

If it were to happen, IF.... would something else besides BND vanguard total bond, be preferred as it's replacement?
Or does it not matter?
Arguing for the sake of arguing is something I am not going to engage in.

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Re: Negative Interest Rates in U.S.

Post by Jags4186 » Sun Aug 11, 2019 12:01 pm

Smoke wrote:
Sun Aug 11, 2019 12:00 pm
If it were to happen, IF.... would something else besides BND vanguard total bond, be preferred as it's replacement?
Or does it not matter?
Cash wrapped in plastic buried in the backyard.

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Re: Negative Interest Rates in U.S.

Post by SimpleGift » Sun Aug 11, 2019 12:20 pm

JoMoney wrote:
Sun Aug 11, 2019 11:40 am
The big question is how long will rates remain low, and when they rise, how quickly will they rise?
There's a school of thought today that rates may never rise back to historical averages. In other words, today's low and negative interest rates are not some unnatural distortion created by central banks around the world trying to stimulate economic growth, but rather they are a natural market price that reflects today's modern risk environment, investor's current risk tolerance, and the global supply and demand for capital.

Yes, loans that paid positive interest date back through some 2,500 years of human history — but the world was a much riskier place and capital was in short supply. Today, the bond market has become much deeper and more liquid. It is now almost unthinkable that some debt could default, especially that issued by highly-rated governments. Inflation in recent decades has been low and predictable.

In short, if there is effectively no risk to some debt, and investors are willing to pay for a store of value, this would mean negative interest rates may have become natural. It's a prospect to think about at least.

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Re: Negative Interest Rates in U.S.

Post by JoeRetire » Sun Aug 11, 2019 12:21 pm

DaufuskieNate wrote:
Sun Aug 11, 2019 7:55 am
If the Fed cuts rates all the way back down to zero and restarts quantitative easing, negative yields on U.S. Treasuries could swiftly change from theory to reality.
LOL!

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Re: Negative Interest Rates in U.S.

Post by JoMoney » Sun Aug 11, 2019 12:44 pm

SimpleGift wrote:
Sun Aug 11, 2019 12:20 pm
JoMoney wrote:
Sun Aug 11, 2019 11:40 am
The big question is how long will rates remain low, and when they rise, how quickly will they rise?
There's a school of thought today that rates may never rise back to historical averages. In other words, today's low and negative interest rates are not some unnatural distortion created by central banks around the world trying to stimulate economic growth, but rather they are a natural market price that reflects today's modern risk environment, investor's current risk tolerance, and the global supply and demand for capital.

Yes, loans that paid positive interest date back through some 2,500 years of human history — but the world was a much riskier place and capital was in short supply. Today, the bond market has become much deeper and more liquid. It is now almost unthinkable that some debt could default, especially that issued by highly-rated governments. Inflation in recent decades has been low and predictable.

In short, if there is effectively no risk to some debt, and investors are willing to pay for a store of value, this would mean negative interest rates may have become natural. It's a prospect to think about at least.
I don't have any question that central banks are manipulating interest rates (through the open market) using monetary policy, it's a matter of fact.
"Historical average" interest rates, and when (if ever) they might revert is a interesting question, but is also distinct from simply rising rates, and how high, and how quickly they might rise. I don't think anybody knows the answer, but if you had an answer or were willing to bet on it, it would be useful in guiding investment decisions.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Negative Interest Rates in U.S.

Post by DaufuskieNate » Sun Aug 11, 2019 1:10 pm

JoeRetire wrote:
Sun Aug 11, 2019 12:21 pm
DaufuskieNate wrote:
Sun Aug 11, 2019 7:55 am
If the Fed cuts rates all the way back down to zero and restarts quantitative easing, negative yields on U.S. Treasuries could swiftly change from theory to reality.
LOL!

If a frog had wings, he wouldn't bump his booty.
The current issue of The Economist lists the following 10-year government bonds with negative interest rates: Japan, Euro Area, Austria, Belgium, France, Germany, Netherlands, Denmark, Sweden and Switzerland. That's a lot of flying frogs!

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Re: Negative Interest Rates in U.S.

Post by Kevin M » Sun Aug 11, 2019 1:25 pm

In the last 11 years, there have been three periods of generally declining Treasury note and bond yields when the 10-year yield got to similar or even lower levels than it is now, and that was when the effective federal funds rate (EFFR) was about to 0.1% or 0.4%, compared to about 2.1% now. Even the 20-year yield was near or below what it is now during those periods.

Image

And in the previous low-yield periods, the Fed had even less room to lower the FFR.

Why all the concern about negative yields now, when it didn't happen during the previous periods of low yields?

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Re: Negative Interest Rates in U.S.

Post by SimpleGift » Sun Aug 11, 2019 1:26 pm

JoMoney wrote:
Sun Aug 11, 2019 12:44 pm
I don't have any question that central banks are manipulating interest rates (through the open market) using monetary policy, it's a matter of fact.
Right. Central banks have definitely had an influence on the shorter end of the yield curve worldwide. But the rates on longer-term, high-quality bonds have been drifting lower for several decades (chart below), giving some support to the viewpoint that negative rates may be becoming the natural market prices today.
Some of this decline in longer-term rates may be a reaction to the lower short-term rates (i.e., investors taking on more term risk to find positive returns) — but my sense is there are larger secular forces driving the decrease in longer-term rates, including aging demographics, low and predictable inflation, low global growth and demand, etc.

It's hard to imagine that negative rates could be today's "natural" market prices, but it's worth considering the possibility.

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Re: Negative Interest Rates in U.S.

Post by whodidntante » Sun Aug 11, 2019 1:28 pm

Kevin M wrote:
Sun Aug 11, 2019 1:25 pm
Why all the concern about negative yields now, when it didn't happen during the previous periods of low yields?
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Re: Negative Interest Rates in U.S.

Post by rascott » Sun Aug 11, 2019 1:38 pm

Saw that a Danish bank was now offering a -0.5% ten year mortgage, to homeowners/buyers.

Interesting times, indeed.

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Re: Negative Interest Rates in U.S.

Post by garlandwhizzer » Sun Aug 11, 2019 2:03 pm

A long time ago, Bill Gross, after a long distinguished career of bond market investing success with PIMCO, made some bets in the bond market that and completely missed the continuation of the Treasury bond bull market. His reputation never recovered to its prior status. At the time he also coined the term "the new normal," a period in financial markets in which forward returns from both bonds and stocks were expected to be depressed relative to historical averages. This also turned out to be the opposite of what happened in both stock and bond markets in the near term which was a continued bull run.

Looking at the situation now, I'm wondering if Gross was right but simply made the call too soon. There are strong economic secular forces worldwide now that dim our rosy picture for both equity and bond market returns going forward. We're still doing fine but there are some serious clouds on the horizon, more than is usually the case IMO. Worldwide interest rates are at all time lows. For the first time in history negative interest rates and QE have been resorted to in massive quantities. These are not the causes of but rather the effects from underlying economic vulnerability IMO. We have equity markets and economies whose sluggish or absent economic growth is absolutely dependent on these hyper-aggressive monetary policies. How this will all unwind over time is uncertain but we're in a place we've never been to before. As usual a widely diversified all weather portfolio is IMO the best approach for investors. I don't think the "new normal" if that is what this is changes investment approach.

Garland Whizzer

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Phineas J. Whoopee
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Re: Negative Interest Rates in U.S.

Post by Phineas J. Whoopee » Sun Aug 11, 2019 2:56 pm

At present there is no mechanism by which competitive bidders can ask for negative yields in primary Treasury auctions. One could be implemented, of course. Naturally on the secondary market whatever happens happens.

It is a separate question from whether the Federal Funds Rate, FFR, will become negative. The Fed directly controls that, as it does interest on reserves, both required and excess. These are best viewed as tools of monetary policy.

PJW

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Re: Negative Interest Rates in U.S.

Post by willthrill81 » Sun Aug 11, 2019 3:01 pm

Phineas J. Whoopee wrote:
Sun Aug 11, 2019 2:56 pm
It is a separate question from whether the Federal Funds Rate, FFR, will become negative. The Fed directly controls that, as it does interest on reserves, both required and excess. These are best viewed as tools of monetary policy.
This is an important point lost on many, who assume that the Fed funds rate has a more or less guaranteed and fixed impact on the performance of the bond market. But this is simply not true. As an illustration, the Fed funds rate has increased by over 2% since January of 2009, yet long-term Treasuries have had significantly higher returns than short-term Treasuries since that time.
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Re: Negative Interest Rates in U.S.

Post by staustin » Sun Aug 11, 2019 3:21 pm

garlandwhizzer wrote:
Sun Aug 11, 2019 2:03 pm
A long time ago, Bill Gross, after a long distinguished career of bond market investing success with PIMCO, made some bets in the bond market that and completely missed the continuation of the Treasury bond bull market. His reputation never recovered to its prior status. At the time he also coined the term "the new normal," a period in financial markets in which forward returns from both bonds and stocks were expected to be depressed relative to historical averages. This also turned out to be the opposite of what happened in both stock and bond markets in the near term which was a continued bull run.

Looking at the situation now, I'm wondering if Gross was right but simply made the call too soon. There are strong economic secular forces worldwide now that dim our rosy picture for both equity and bond market returns going forward. We're still doing fine but there are some serious clouds on the horizon, more than is usually the case IMO. Worldwide interest rates are at all time lows. For the first time in history negative interest rates and QE have been resorted to in massive quantities. These are not the causes of but rather the effects from underlying economic vulnerability IMO. We have equity markets and economies whose sluggish or absent economic growth is absolutely dependent on these hyper-aggressive monetary policies. How this will all unwind over time is uncertain but we're in a place we've never been to before. As usual a widely diversified all weather portfolio is IMO the best approach for investors. I don't think the "new normal" if that is what this is changes investment approach.

Garland Whizzer
very well said... Particularly.. "As usual a widely diversified all weather portfolio is IMO the best approach for investors."
Harry Browne's admonitions come to mind these days. His permanent portfolio, or Dalio's all weather, are worthy of serious consideration for today's q/e / debt monetization situation.

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Re: Negative Interest Rates in U.S.

Post by nisiprius » Sun Aug 11, 2019 3:22 pm

Kevin M wrote:
Sun Aug 11, 2019 1:25 pm
...Why all the concern about negative yields now, when it didn't happen during the previous periods of low yields?...
My question precisely.
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Re: Negative Interest Rates in U.S.

Post by BlueOrange10 » Sun Aug 11, 2019 3:28 pm

Kevin M wrote:
Sun Aug 11, 2019 1:25 pm
Why all the concern about negative yields now, when it didn't happen during the previous periods of low yields?
Because of demographics. US median age has never been higher. Older populations means a greater desire for fixed income.

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Re: Negative Interest Rates in U.S.

Post by lazyday » Sun Aug 11, 2019 4:03 pm

nisiprius wrote:
Sun Aug 11, 2019 3:22 pm
Kevin M wrote:
Sun Aug 11, 2019 1:25 pm
...Why all the concern about negative yields now, when it didn't happen during the previous periods of low yields?...
My question precisely.
I thought it was a rhetorical question. :)

A simple answer is because we see it actually happening now in so many countries. And if that’s a big surprise, if may cause some to change their worldview.

I thought that ~0 was the floor and was surprised by negative rates especially in long bonds, but personally am not afraid of negative rates. There may be good alternatives for an individual, and if not I’ll make a choice when the time comes.

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Re: Negative Interest Rates in U.S.

Post by Dead Man Walking » Sun Aug 11, 2019 4:05 pm

garlandwhizzer wrote:
Sun Aug 11, 2019 2:03 pm
How this will all unwind over time is uncertain but we're in a place we've never been to before. As usual a widely diversified all weather portfolio is IMO the best approach for investors. I don't think the "new normal" if that is what this is changes investment approach.

Garland Whizzer
I have read several articles about the negative interest rate environment by notable economists. I have not posted them here because all have included political commentary which is not permitted here. The bottom line on the opinions of most was that this is a risk story that is bound to end badly. I agree with your assessment of the best approach for investors.

DMW

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Re: Negative Interest Rates in U.S.

Post by staustin » Sun Aug 11, 2019 4:09 pm

nisiprius wrote:
Sun Aug 11, 2019 3:22 pm
Kevin M wrote:
Sun Aug 11, 2019 1:25 pm
...Why all the concern about negative yields now, when it didn't happen during the previous periods of low yields?...
My question precisely.
Dalio postulated recently that this was due to ongoing q/e.. it being the 'monetary steroid' that was less and less effective as it continues, eventually resulting in debt monetization. he continued to say that bonds and cash would not be prudent investments (not reliable stores of value in his words) in an environment when the worlds central banks are all trying to devalue their fiat currencies at the same time. his recommendations were to allocate the bond percentage of ones portfolio to gold, real estate, or rising asian economies (stocks and bonds). I haven't had the courage to do such... perhaps i will if this trend continues.

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Re: Negative Interest Rates in U.S.

Post by SimpleGift » Sun Aug 11, 2019 4:13 pm

nisiprius wrote:
Sun Aug 11, 2019 3:22 pm
Kevin M wrote:
Sun Aug 11, 2019 1:25 pm
...Why all the concern about negative yields now, when it didn't happen during the previous periods of low yields?...
My question precisely.
A year ago, when negative interest rates around the world were confined mostly to short-term government bonds (at left, chart below), one could rationalize that negative rates were just a market distortion created by the monetary policies of central banks.

However today, when longer-term government bonds and more corporate bonds are starting to be priced with negative yields, there's much more evidence that natural market forces are at work in negative yields, independent of central bank policies.
In some respects, negative interest rates today are just a natural extension of the disinflationary and low growth trends that have been at work around the world for several decades, in my view.
Last edited by SimpleGift on Sun Aug 11, 2019 4:14 pm, edited 2 times in total.

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Re: Negative Interest Rates in U.S.

Post by lazyday » Sun Aug 11, 2019 4:14 pm

Dead Man Walking wrote:
Sun Aug 11, 2019 4:05 pm
I have read several articles about the negative interest rate environment by notable economists. I have not posted them here because all have included political commentary which is not permitted here. ....
I've posted articles and videos before with political content, careful to only point to or quote the parts which are allowed on the forum.

So far I haven't had trouble with this, but of course it's possible for a fight to start. I usually just avoided mentioning the politics at all, not even mentioning forum rules or asking people not to discuss it.

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Re: Negative Interest Rates in U.S.

Post by LadyGeek » Sun Aug 11, 2019 4:30 pm

I merged DaufuskieNate's thread into the on-going discussion. The combined thread is in the Investing - Theory, News & General forum (general discussion, news).
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Re: Negative Interest Rates in U.S.

Post by Oicuryy » Sun Aug 11, 2019 4:39 pm

Phineas J. Whoopee wrote:
Sun Aug 11, 2019 2:56 pm
At present there is no mechanism by which competitive bidders can ask for negative yields in primary Treasury auctions.
Are you sure about that?
In April 2011, Treasury amended paragraph (b) of 31 CFR 356.20 to state that if a Treasury note or bond auction results in a yield lower than 0.125 percent, the interest rate will be set at 1/8 of one percent with the price adjusted accordingly (i.e., at a premium). This change applies to all subsequent marketable Treasury note and bond issues: Treasury fixed-principal (also referred to as nominal) notes and bonds as well as Treasury inflation-protected notes and bonds.
https://www.treasurydirect.gov/instit/m ... gative.htm

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Re: Negative Interest Rates in U.S.

Post by Dandy » Sun Aug 11, 2019 4:56 pm

the prospect of negative rates is very unsettling. It is also why backtested ideal allocations, safe withdrawal rates, etc. have to be taken with a grain of salt. Negative rates is entering new investment territory and upside down thinking.

e.g. If you are due a tax refund do you delay it until April 15 and delay cashing the check (if that is still possible) for awhile so you avoid some loss of value? Do you over withhold to make sure you get a refund? Do people flee from short term "safe" Treasuries and go long term?, Corporate? Is a flight to quality still Treasuries? Is the dollar still the currency to hold, if not what happens if countries stop holding them? What happens to annuities - their investments, company viability? Pension assets? :oops: my head hurts just thinking of things to worry about. :happy

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Re: Negative Interest Rates in U.S.

Post by Angst » Sun Aug 11, 2019 5:01 pm

Oicuryy wrote:
Sun Aug 11, 2019 4:39 pm
Phineas J. Whoopee wrote:
Sun Aug 11, 2019 2:56 pm
At present there is no mechanism by which competitive bidders can ask for negative yields in primary Treasury auctions.
Are you sure about that?
In April 2011, Treasury amended paragraph (b) of 31 CFR 356.20 to state that if a Treasury note or bond auction results in a yield lower than 0.125 percent, the interest rate will be set at 1/8 of one percent with the price adjusted accordingly (i.e., at a premium). This change applies to all subsequent marketable Treasury note and bond issues: Treasury fixed-principal (also referred to as nominal) notes and bonds as well as Treasury inflation-protected notes and bonds.
https://www.treasurydirect.gov/instit/m ... gative.htm

Ron
I can't help but wonder how the discussion went regarding the choice of 0.125% vs. simply 0.000%. I assume a discussion did take place. It just seems on the face of things it would be neater, cleaner and perhaps even useful to the bond market for 0.000% or a true "zero coupon" treasury instrument to have been the choice rather than 0.125%. I believe that most of Europe has fallen in line with 0.000% while Japan hasn't. What are the pros and cons?

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