Negative Interest Rates and Holding Cash instead of bonds

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bligh
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Negative Interest Rates and Holding Cash instead of bonds

Post by bligh » Wed Mar 25, 2020 2:12 pm

I was curious to see what everyone's thoughts were on the US Treasuries nominal interest rates starting to go negative.

Negative rates come to the US: 1-month and 3-month Treasury bill yields are now below zero:
https://www.cnbc.com/2020/03/25/negativ ... ative.html

Now that the U.S is in the process of joining other developed markets in providing negative interest rates on government bonds, I am not sure how that affects the bond portion of the portfolio. Anyone know what percentage of BND (Vanguard US. Total Bond Index) is made up of these short term treasuries?

I am wondering if it still makes to hold these. Perhaps it is time to go to start moving fixed income to cash?

venus_06
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Re: Negative Interest Rates and Holding Cash instead of bonds

Post by venus_06 » Wed Mar 25, 2020 2:29 pm

A (maybe stupid) question: how will this impact the rates on money market funds, for example Vanguard Treasury VUSXX or Prime VMMXX or funds that hold these short term T bills? I heard discussions about liquidity and maintaining the NAV at 1.00, but what about when the underlying assets start going to negative yield? Does that mean the yields on the MMFs might not only go close to zero but could also go negative, or I'm just overthinking this?

bberris
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Re: Negative Interest Rates and Holding Cash instead of bonds

Post by bberris » Thu Mar 26, 2020 8:56 am

Reposting from another thread:

GORXX, the cash sweep vehicle I selected for TDA, is showing 0.01 % yield, and -0.28 % unsubsidized. Are they really eating that? Not a good time to run a US treasury money market fund. I'm guessing they will close it for new cash soon.

On a related note, SIPC protects cash balances up to $250,000.

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Phineas J. Whoopee
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Re: Negative Interest Rates and Holding Cash instead of bonds

Post by Phineas J. Whoopee » Thu Mar 26, 2020 8:57 pm

SiPC insurance does not guarantee the yield of one's fixed income assets. It only guarantees they will still exist should the broker fail and it turns out the principals stole the assets. That's hard to do unless one is trying to outfox the markets with restricted securities, as happened with Bernie Madoff. Ordinary mutual fund companies do not hold the assets themselves, therefore can't steal them. Under the Investment Company Act of 1940 mutual fund companies must contract with a third party to hold the assets.

HSBC won't steal your Ford stock, because if it did its lucrative custodial business would dry up. MF Global, often used as a counterexample, existed specifically for the purpose of holding non-SIPC-covered assets, strictly for sophisticated investors who needed no protection. It took years, but eventually the liquidator recovered all investors' original assets.

Mr. Madoff, of course, similarly limited his investors to accredited ones who by definition need no protection. He's asked for compassionate release due to terminal kidney disease. I have no personal ill will toward him, but of course there's a reason he drew a sentence of 150 years. I'll accept the outcome of the court case.

PJW

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Random Musings
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Re: Negative Interest Rates and Holding Cash instead of bonds

Post by Random Musings » Thu Mar 26, 2020 9:07 pm

One concern I have is that with the stimulus package that our government will be issuing a lot of debt. Perhaps a supply shock that will make yields go up.

RM
I figure the odds be fifty-fifty I just might have something to say. FZ

GaryA505
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Re: Negative Interest Rates and Holding Cash instead of bonds

Post by GaryA505 » Thu Mar 26, 2020 11:01 pm

I was wondering if it would be better to use money market or total bond, so maybe I'll just put half in each. That way I can only be half wrong and half right.

justsomeguy2018
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Re: Negative Interest Rates and Holding Cash instead of bonds

Post by justsomeguy2018 » Thu Mar 26, 2020 11:10 pm

GaryA505 wrote:
Thu Mar 26, 2020 11:01 pm
I was wondering if it would be better to use money market or total bond, so maybe I'll just put half in each. That way I can only be half wrong and half right.
That's what I did.

123
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Re: Negative Interest Rates and Holding Cash instead of bonds

Post by 123 » Thu Mar 26, 2020 11:14 pm

We hold a couple of 12 month treasury bills maturing in June. When I browsed our accounts this afternoon I saw that the broker's mark-to-market evaluation of each bond is a current valuation that is a (ever so) slightly higher than their par value. If I could get a bid price is in the range of the mark-to-market value I might be better off selling them and then placing the proceeds in a CD. Based on my current situation the value of the bonds will decrease (due to negative interest rate) until they reach their par value in June. Something for me to think about.
The closest helping hand is at the end of your own arm.

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gmaynardkrebs
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Re: Negative Interest Rates and Holding Cash instead of bonds

Post by gmaynardkrebs » Fri Mar 27, 2020 12:19 am

bligh wrote:
Wed Mar 25, 2020 2:12 pm
I was curious to see what everyone's thoughts were on the US Treasuries nominal interest rates starting to go negative.

Negative rates come to the US: 1-month and 3-month Treasury bill yields are now below zero:
https://www.cnbc.com/2020/03/25/negativ ... ative.html

Now that the U.S is in the process of joining other developed markets in providing negative interest rates on government bonds, I am not sure how that affects the bond portion of the portfolio. Anyone know what percentage of BND (Vanguard US. Total Bond Index) is made up of these short term treasuries?

I am wondering if it still makes to hold these. Perhaps it is time to go to start moving fixed income to cash?
Were they sold at negative rates?

bberris
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Re: Negative Interest Rates and Holding Cash instead of bonds

Post by bberris » Fri Mar 27, 2020 6:13 am

Phineas J. Whoopee wrote:
Thu Mar 26, 2020 8:57 pm
SiPC insurance does not guarantee the yield of one's fixed income assets. It only guarantees they will still exist should the broker fail and it turns out the principals stole the assets. That's hard to do unless one is trying to outfox the markets with restricted securities, as happened with Bernie Madoff. Ordinary mutual fund companies do not hold the assets themselves, therefore can't steal them. Under the Investment Company Act of 1940 mutual fund companies must contract with a third party to hold the assets.

HSBC won't steal your Ford stock, because if it did its lucrative custodial business would dry up. MF Global, often used as a counterexample, existed specifically for the purpose of holding non-SIPC-covered assets, strictly for sophisticated investors who needed no protection. It took years, but eventually the liquidator recovered all investors' original assets.

Mr. Madoff, of course, similarly limited his investors to accredited ones who by definition need no protection. He's asked for compassionate release due to terminal kidney disease. I have no personal ill will toward him, but of course there's a reason he drew a sentence of 150 years. I'll accept the outcome of the court case.

PJW
I was referring to cash balances, uninvested cash at a brokerage. This has become important because of negative yields on treasuries. This cash can be used by the brokerage in their business, lent out at margin. The potential for failure at a major brokerage is small but real. I noticed that margin requirements at TDA have been raised even for VTI, for example.

Call_Me_Op
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Re: Negative Interest Rates and Holding Cash instead of bonds

Post by Call_Me_Op » Fri Mar 27, 2020 6:23 am

bberris wrote:
Thu Mar 26, 2020 8:56 am
Reposting from another thread:

GORXX, the cash sweep vehicle I selected for TDA, is showing 0.01 % yield, and -0.28 % unsubsidized. Are they really eating that? Not a good time to run a US treasury money market fund. I'm guessing they will close it for new cash soon.

On a related note, SIPC protects cash balances up to $250,000.
Not exactly. SIPC does not protect the value, they only ensure that you get the securities in the event the custodian goes bankrupt.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

bberris
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Re: Negative Interest Rates and Holding Cash instead of bonds

Post by bberris » Fri Mar 27, 2020 7:04 am

Call_Me_Op wrote:
Fri Mar 27, 2020 6:23 am
bberris wrote:
Thu Mar 26, 2020 8:56 am
Reposting from another thread:

GORXX, the cash sweep vehicle I selected for TDA, is showing 0.01 % yield, and -0.28 % unsubsidized. Are they really eating that? Not a good time to run a US treasury money market fund. I'm guessing they will close it for new cash soon.

On a related note, SIPC protects cash balances up to $250,000.
Not exactly. SIPC does not protect the value, they only ensure that you get the securities in the event the custodian goes bankrupt.
Just to clear up any confusion, again I am referring to cash not securities. My point was that with negative yields, one could avoid using a cash sweep vehicle. I thought I made that clear. Cash. Money. Bread. Coin. Even if it isn't US dollars.
SIPC web site:

"How is my cash protected:

SIPC protects cash in a brokerage firm account from the sale of or for the purchase of securities. Cash held in connection with a commodities trade is not protected by SIPC. Money market mutual funds, often thought of as cash, are protected as securities by SIPC. SIPC protects cash held by the broker for customers in connection with the customers’ purchase or sale of securities whether the cash is in U.S. dollars or denominated in non-U.S. dollar currency."

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