Negative Interest Rates: What's the Big Deal?

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bck63
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Negative Interest Rates: What's the Big Deal?

Post by bck63 »

Simple question: If rates continue to declines, and go nominally negative, won't the NAV of a bond fund continue to increase? Does that rule change once bonds go negative?

If that doesn't change, why should I care? As rates go down, the NAV will go up. When/if rates begin to rise, NAV will decrease but I will begin to have more interest income.

Am I way off on this?
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Re: Negative Interest Rates: What's the Big Deal?

Post by 000 »

Eventually you get reinvested at the new negative rates or you cash out into assets with sky-high valuations.
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Re: Negative Interest Rates: What's the Big Deal?

Post by jarjarM »

Asset bubble. If investors can't get a decent return on their savings in bonds/treasuries, then they'll start to move up the risk ladder. Fed fund rate at 0% for extended period of time was partially blame for the 2008 financial crisis. Imagine what negative rate can motivate normally "cool" headed investor do :twisted:
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Re: Negative Interest Rates: What's the Big Deal?

Post by nisiprius »

000 wrote: Fri Aug 07, 2020 3:59 pm Eventually you get reinvested at the new negative rates or you cash out into assets with sky-high valuations.
You don't even need to wait for reinvestment, or for the old positive-rate bonds to get purged from the bond fund. There's a very simple observation that took me the longest time to figure out. It does depend on one unnatural assumption, which is that interest rates actually stabilize and become constant. But let's assume they do, and that the final interest rate, R, is constant (and the same over all terms).

First, let's assume R is positive.

While interest rates were changing, the market value of all the bonds in your bond fund were responding to that that change and changing, too. But when the rate stabilizes, we now have a rather mixed-up collection of specific numbers of dollars to be paid on specific future dates.

Each one of those payments must be discounted according to how far in the future it is, according to the interest rate R. Assume they are all at least a year off, and assume we wait a year.

Every single one of those payment has one less year to go. That means the value of that future payment is higher now, because you will be getting it one year sooner, and it is in fact exactly R% higher.

So the instant the interest rate stabilizes, the value of the bond portfolio begins increasing at exactly R% per year. It follows the interest rate. It has to. It's bond math. In order to make that happen, of course, all the bonds in the portfolio had to "prepare" for it by experiencing value changes while responding to the changing interest rate.

Now if R is negative, it is no different. While the interest rate is falling, all the bonds in the portfolio get a boost in value. But if R drops to, let's say -1% and then stabilizes, the instant that happens, the value of the bond portfolio begins falling by exactly 1% per year.
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Re: Negative Interest Rates: What's the Big Deal?

Post by bck63 »

nisiprius wrote: Fri Aug 07, 2020 4:19 pm
000 wrote: Fri Aug 07, 2020 3:59 pm Eventually you get reinvested at the new negative rates or you cash out into assets with sky-high valuations.
You don't even need to wait for reinvestment, or for the old positive-rate bonds to get purged from the bond fund. There's a very simple observation that took me the longest time to figure out. It does depend on one unnatural assumption, which is that interest rates actually stabilize and become constant. But let's assume they do, and that the final interest rate, R, is constant (and the same over all terms).

First, let's assume R is positive.

While interest rates were changing, the market value of all the bonds in your bond fund were responding to that that change and changing, too. But when the rate stabilizes, we now have a rather mixed-up collection of specific numbers of dollars to be paid on specific future dates.

Each one of those payments must be discounted according to how far in the future it is, according to the interest rate R. Assume they are all at least a year off, and assume we wait a year.

Every single one of those payment has one less year to go. That means the value of that future payment is higher now, because you will be getting it one year sooner, and it is in fact exactly R% higher.

So the instant the interest rate stabilizes, the value of the bond portfolio begins increasing at exactly R% per year. It follows the interest rate. It has to. It's bond math. In order to make that happen, of course, all the bonds in the portfolio had to "prepare" for it by experiencing value changes while responding to the changing interest rate.

Now if R is negative, it is no different. While the interest rate is falling, all the bonds in the portfolio get a boost in value. But if R drops to, let's say -1% and then stabilizes, the instant that happens, the value of the bond portfolio begins falling by exactly 1% per year.
Wow. Thank you for this. Nisiprius, to borrow a phrase my wife likes to use, you have a big brain.

Thanks again.
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Re: Negative Interest Rates: What's the Big Deal?

Post by 000 »

nisiprius wrote: Fri Aug 07, 2020 4:19 pm
000 wrote: Fri Aug 07, 2020 3:59 pm Eventually you get reinvested at the new negative rates or you cash out into assets with sky-high valuations.
You don't even need to wait for reinvestment, or for the old positive-rate bonds to get purged from the bond fund. There's a very simple observation that took me the longest time to figure out. It does depend on one unnatural assumption, which is that interest rates actually stabilize and become constant. But let's assume they do, and that the final interest rate, R, is constant (and the same over all terms).

First, let's assume R is positive.

While interest rates were changing, the market value of all the bonds in your bond fund were responding to that that change and changing, too. But when the rate stabilizes, we now have a rather mixed-up collection of specific numbers of dollars to be paid on specific future dates.

Each one of those payments must be discounted according to how far in the future it is, according to the interest rate R. Assume they are all at least a year off, and assume we wait a year.

Every single one of those payment has one less year to go. That means the value of that future payment is higher now, because you will be getting it one year sooner, and it is in fact exactly R% higher.

So the instant the interest rate stabilizes, the value of the bond portfolio begins increasing at exactly R% per year. It follows the interest rate. It has to. It's bond math. In order to make that happen, of course, all the bonds in the portfolio had to "prepare" for it by experiencing value changes while responding to the changing interest rate.

Now if R is negative, it is no different. While the interest rate is falling, all the bonds in the portfolio get a boost in value. But if R drops to, let's say -1% and then stabilizes, the instant that happens, the value of the bond portfolio begins falling by exactly 1% per year.
Thanks, I appreciate the info.

I must view it, though, as just another reason not to invest in bonds, especially funds. It's amazing that such a low return asset has so much risk, complexity, and opacity compared to cash, CDs, and Government Savings Bonds.
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Re: Negative Interest Rates: What's the Big Deal?

Post by JBTX »

What's the big deal? If you don't mind getting less money back than you invested, then there isn't one.
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Re: Negative Interest Rates: What's the Big Deal?

Post by bck63 »

JBTX wrote: Fri Aug 07, 2020 5:20 pm What's the big deal? If you don't mind getting less money back than you invested, then there isn't one.
But interest rates could go below zero and you might not lose money, as indicated above. If you bought an intermediate-term bond fund with an SEC yield of 5%, and rates increased to 6%, you'd lose money if you had to sell. If rates dropped to 4%, your funds NAV would rise.

Is there really a difference? Interest rates have fluctuated up and down forever. There's nothing to say they'll stay below zero forever.
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Re: Negative Interest Rates: What's the Big Deal?

Post by fredflinstone »

Serious question: How low would bond yields have to fall before you'd buy currency instead of bonds?
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Re: Negative Interest Rates: What's the Big Deal?

Post by JBTX »

bck63 wrote: Fri Aug 07, 2020 5:41 pm
JBTX wrote: Fri Aug 07, 2020 5:20 pm What's the big deal? If you don't mind getting less money back than you invested, then there isn't one.
But interest rates could go below zero and you might not lose money, as indicated above. If you bought an intermediate-term bond fund with an SEC yield of 5%, and rates increased to 6%, you'd lose money if you had to sell. If rates dropped to 4%, your funds NAV would rise.

Is there really a difference? Interest rates have fluctuated up and down forever. There's nothing to say they'll stay below zero forever.
If you hold it to maturity you will lose money. If rates go down, and you sell early, maybe you'll get a positive nominal return. Maybe you won't. It depends. If rates go up, your price will go down prior to maturity. So you are pretty much guaranteed to lose money.

In most cases you lose money.

People complicate it, but it is really easy. If rates are negative, then all else equal, you lose money. Period. Speculating that rates *might* go down is just speculation.
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Re: Negative Interest Rates: What's the Big Deal?

Post by bck63 »

JBTX wrote: Fri Aug 07, 2020 5:50 pm In most cases you lose money.

People complicate it, but it is really easy. If rates are negative, then all else equal, you lose money. Period. Speculating that rates *might* go down is just speculation.
Point taken. So what does one do? Someone who say, has all his retirement fixed income in intermediate term bonds? Or bonds in taxable (yes I have some bonds in taxable).
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Re: Negative Interest Rates: What's the Big Deal?

Post by JBTX »

bck63 wrote: Fri Aug 07, 2020 5:53 pm
JBTX wrote: Fri Aug 07, 2020 5:50 pm In most cases you lose money.

People complicate it, but it is really easy. If rates are negative, then all else equal, you lose money. Period. Speculating that rates *might* go down is just speculation.
Point taken. So what does one do? Someone who say, has all his retirement fixed income in intermediate term bonds? Or bonds in taxable (yes I have some bonds in taxable).
Maybe nothing. Maybe that is the best you can do. In my case I'm looking for alternatives around the fringes. More TIPS. Ibonds. Maybe EEBONDS? CDS. Paying off mortgage looks more attractive. Or just sticking in high yield bank account, which loses money on a real basis, but you aren't locked in long term.
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Re: Negative Interest Rates: What's the Big Deal?

Post by bck63 »

JBTX wrote: Fri Aug 07, 2020 5:57 pm
bck63 wrote: Fri Aug 07, 2020 5:53 pm
JBTX wrote: Fri Aug 07, 2020 5:50 pm In most cases you lose money.

People complicate it, but it is really easy. If rates are negative, then all else equal, you lose money. Period. Speculating that rates *might* go down is just speculation.
Point taken. So what does one do? Someone who say, has all his retirement fixed income in intermediate term bonds? Or bonds in taxable (yes I have some bonds in taxable).
Maybe nothing. Maybe that is the best you can do. In my case I'm looking for alternatives around the fringes. More TIPS. Ibonds. Maybe EEBONDS? CDS. Paying off mortgage looks more attractive. Or just sticking in high yield bank account, which loses money on a real basis, but you aren't locked in long term.
Thank you. We are whacking the mortgage down.
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Re: Negative Interest Rates: What's the Big Deal?

Post by AlohaJoe »

fredflinstone wrote: Fri Aug 07, 2020 5:47 pm Serious question: How low would bond yields have to fall before you'd buy currency instead of bonds?
Where are you going to store your currency? At home? How big is the bond portfolio of your portfolio? $200,000? $500,000? That's a lot of cash to keep at home.
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Re: Negative Interest Rates: What's the Big Deal?

Post by columbia »

I definitely won't be driving up demand for negative yielding bonds.
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Re: Negative Interest Rates: What's the Big Deal?

Post by 7eight9 »

bck63 wrote: Fri Aug 07, 2020 5:53 pm
JBTX wrote: Fri Aug 07, 2020 5:50 pm In most cases you lose money.

People complicate it, but it is really easy. If rates are negative, then all else equal, you lose money. Period. Speculating that rates *might* go down is just speculation.
Point taken. So what does one do? Someone who say, has all his retirement fixed income in intermediate term bonds? Or bonds in taxable (yes I have some bonds in taxable).
In lieu of (or in addition to) bonds one might considering multi-year guaranteed annuities (MYGAs).

Example --- Fixed Annuity Rates for August 2020 ---https://www.blueprintincome.com/fixed-annuities

Five year rates as high as 3.45% per above link.
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Re: Negative Interest Rates: What's the Big Deal?

Post by Dude2 »

jarjarM wrote: Fri Aug 07, 2020 4:08 pm Asset bubble. If investors can't get a decent return on their savings in bonds/treasuries, then they'll start to move up the risk ladder. Fed fund rate at 0% for extended period of time was partially blame for the 2008 financial crisis. Imagine what negative rate can motivate normally "cool" headed investor do :twisted:
The entire concept of bonds is called into question at that 0% line. I'd like to understand the economic theory that says otherwise. Isn't this essentially a devaluation of the currency? Maybe we have to think of everything being relative to inflation. Then the line is at 0% return with 0% inflation. Who would knowingly throw their money into the fire represented by crossing that line? If the answer is less and less people, then will businesses be able to raise capital to fund their business needs? Stocks need bonds in other words. I mean being cool and levelheaded implies that we have a grasp of what has value and are able to distinguish a spectrum of safe vs risky. Cross the line and value starts to tread on shaky ground. You don't go out in a boat that leaks so much you can't even call it a boat anymore.
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Re: Negative Interest Rates: What's the Big Deal?

Post by Seasonal »

jarjarM wrote: Fri Aug 07, 2020 4:08 pm Asset bubble. If investors can't get a decent return on their savings in bonds/treasuries, then they'll start to move up the risk ladder. Fed fund rate at 0% for extended period of time was partially blame for the 2008 financial crisis. Imagine what negative rate can motivate normally "cool" headed investor do :twisted:
The Fed funds rate didn't hit 0% until December 2008, which was well past the start of the 2008 financial crisis. Lehman filed for bankruptcy in September, at which time the rate was 2%.
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Re: Negative Interest Rates: What's the Big Deal?

Post by minimalistmarc »

We would need a cashless society for negative rates to work, otherwise nobody would keep their money in the bank
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Re: Negative Interest Rates: What's the Big Deal?

Post by Cookie Dough »

Dude2 wrote: Sat Aug 08, 2020 4:37 am The entire concept of bonds is called into question at that 0% line. I'd like to understand the economic theory that says otherwise.
A famous money printer called it insurance, presumably against an even greater loss of purchasing power.
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Re: Negative Interest Rates: What's the Big Deal?

Post by nisiprius »

minimalistmarc wrote: Sat Aug 08, 2020 5:27 am We would need a cashless society for negative rates to work, otherwise nobody would keep their money in the bank
A quarter of US households don't keep their money in the bank today.

Another possibility would be to some split system, in which small investors and household money had access to some system, not available to institutional investors, with a non-negative interest rate. How could this possibly happen? It already exists today in the differentials between FDIC-insured bank accounts, limited to $250,000, and Treasury bills. It also exists today in United States Savings Bonds, which are a fairly good deal, but essentially only available to small investors due to being limited to a total investment of $10,000 per person per year. I think an "entity" like a corporation can buy them but the limit, and the fact that savings bonds are not marketable, means we are not going to see a savings bond ETF any time soon.

Perhaps we will see a rebirth of the postal savings banks which existed from 1911 to 1966. I just barely remember reading something somewhere about their existence as a kid--they still existed although I never heard of anybody actually using them, and I don't believe they were "advertised"--no posters on the walls--in post offices.
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Re: Negative Interest Rates: What's the Big Deal?

Post by bberris »

minimalistmarc wrote: Sat Aug 08, 2020 5:27 am We would need a cashless society for negative rates to work, otherwise nobody would keep their money in the bank
Dealing strictly in cash has costs and risks of its own. When you want to rebalance, are you going to run to the deposit box, draw a couple hundred grand, deposit it (only for a short time lest the bank start charging you interest) and transfer to the brokerage? How will you handle cash in an IRA? And for institutions with millions in cash, this is just not practical.
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Re: Negative Interest Rates: What's the Big Deal?

Post by Dude2 »

Cookie Dough wrote: Sat Aug 08, 2020 6:41 am
Dude2 wrote: Sat Aug 08, 2020 4:37 am The entire concept of bonds is called into question at that 0% line. I'd like to understand the economic theory that says otherwise.
A famous money printer called it insurance, presumably against an even greater loss of purchasing power.
Seems we could liken it to an expense ratio.
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Re: Negative Interest Rates: What's the Big Deal?

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nisiprius wrote: Sat Aug 08, 2020 6:55 am

Perhaps we will see a rebirth of the postal savings banks which existed from 1911 to 1966. I just barely remember reading something somewhere about their existence as a kid--they still existed although I never heard of anybody actually using them, and I don't believe they were "advertised"--no posters on the walls--in post offices.
A small, speculative investor, could buy a bunch of "forever" stamps. But I suspect one day nobody will use stamps, so you would have to sell them before they had no value ;) If rates on bank savings accounts go negative I'll probably have to start stuffing my mattress. I doubt that will ever happen, but I suppose it is possible. If US government bonds go negative. I'm not sure what I will do. Probably stop buying them, and hold on to the ones I have.

There are two issues here. A bond fund is NOT like buying an actual bond. A bond fund daily value can go up and down. On average, after many years, it will eventually pay the average value of the bonds held. So, if interest rates continue to fall, you can make money in the short term. But if interest rates rise, you'll loose money short term, but eventually start to make the higher rate. With an individual bond you'll make what they promise, unless they default.

For my "fixed income" I keep some in bond funds (both regular and inflation protected), some in the bank, some in EE bonds, some in fixed value funds (I am lucky TIAA is currently paying 3% on most of these funds). I have not yet had to start sticking money in my mattress.
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Re: Negative Interest Rates: What's the Big Deal?

Post by Robot Monster »

nisiprius wrote: Fri Aug 07, 2020 4:19 pm Every single one of those payment has one less year to go. That means the value of that future payment is higher now, because you will be getting it one year sooner, and it is in fact exactly R% higher. So the instant the interest rate stabilizes, the value of the bond portfolio begins increasing at exactly R% per year. It follows the interest rate. It has to. It's bond math.
I don't understand this. Let's say interest rates are 3%, I buy a bond fund, and the next day interest rates go to 2% (which you're calling R%). I understand how the value of the payments would be affected positively by the 1% change. What I don't understand is why the payments would increase 2% in value over a year period. That confounds me.
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Re: Negative Interest Rates: What's the Big Deal?

Post by David Althaus »

If you borrow money the lender would actually have to pay you at the end. If you're the lender you would be better off with money under the mattress. The rest is commentary.

All the best
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Re: Negative Interest Rates: What's the Big Deal?

Post by Robot Monster »

David Althaus wrote: Sat Aug 08, 2020 9:50 am If you borrow money the lender would actually have to pay you at the end. If you're the lender you would be better off with money under the mattress. The rest is commentary.

All the best
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Re: Negative Interest Rates: What's the Big Deal?

Post by zarci »

Serious question. If I buy a bond fund when the bond yield is -1%. I then keep holding and rebalancing from stocks (probably buying more bonds). When at a certain point in the future the bond rates rise again, that means the value of my fund rises no?


I would only lose money if;

1. The bond rate lowered further negative, and i sold
2. (Hypothetical) The bond rate stabilized at that initial negative rate forever.

]
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Re: Negative Interest Rates: What's the Big Deal?

Post by JackoC »

minimalistmarc wrote: Sat Aug 08, 2020 5:27 am We would need a cashless society for negative rates to work, otherwise nobody would keep their money in the bank
Practically you surely mean 'a lot of people would no longer keep their money in bank', not literally 'nobody'. But a lot of people and a lot of $'s are very different things. A large proportion of bank deposits and fixed income investments, like other forms of wealth though not to the extent of some forms, are owned in large quantities by a small % of people. People with $20k safe investments might convince themselves there's no 'cost' to keeping it in $100 bills (though of course there is, the original idea of banks was to keep money safe, it still applies). But people with $100k's or $1mils, the bulk of the total $'s, generally realize that paper currency is not a practical substitute for bank deposits or bonds, at least for most of it.

Anyway if you look at best available small retail local currency bank deposit rates now in countries like Germany, Switzerland etc with negative official short term rates and negative rates on nominal govt bonds far out the yield curve...they aren't negative. If you shop around you needn't settle for a negative rate (or zero rate w/ fees) bank account in those countries. And there's no immediate prospect of that in the US either (an albeit shrinking number of online savings accounts pay +1% with 'zero rate policy' for Fed Funds).

OTOH negative real pre tax rates are a pretty big deal if you make implicit future return assumptions based on 'back testing' using past returns. The long term average after-inflation realized return on US govt bonds has been something like 2% pa, now the 30 yr TIPS yield is -0.4%. As long as you plan realistically based on today's expected returns, 'it is what it is'. If you have an illusion of some kind of necessary 'reversion to the mean' of bond returns to the past average, past bond returns are irrelevant to expected bond return now, that could result in less good decision making.

And some people seem to overthink bond funds. There are various twists to how they perform over various time horizons compared to your own portfolio of individual bonds. But in the big picture if the 30 yr TIPS yield -.4%, you're a long term investor, and assuming much more than that as the probability weighted most likely 'riskless' return, you're kidding yourself. Submerging oneself in the minutiae of bond funds shouldn't be allowed to obscure that.
Last edited by JackoC on Sat Aug 08, 2020 10:14 am, edited 2 times in total.
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Re: Negative Interest Rates: What's the Big Deal?

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dknightd wrote: Sat Aug 08, 2020 8:39 amThere are two issues here. A bond fund is NOT like buying an actual bond. A bond fund daily value can go up and down. On average, after many years, it will eventually pay the average value of the bonds held. So, if interest rates continue to fall, you can make money in the short term. But if interest rates rise, you'll loose money short term, but eventually start to make the higher rate. With an individual bond you'll make what they promise, unless they default.

For my "fixed income" I keep some in bond funds (both regular and inflation protected), some in the bank, some in EE bonds, some in fixed value funds (I am lucky TIAA is currently paying 3% on most of these funds). I have not yet had to start sticking money in my mattress.
Buying a bond fund is still buying bonds. Whether in a fund or not, buying or holding bonds that have a negative YTM still means that you are paying some entity to take your money off your hands for a while.

I don't expect to ever have to choose between getting less than 0 nominal yield or stuffing a mattress with currency (or storing currency in some other, safer, manner). So far in the risk-free space, have not had to settle for less than about 2% nominal CDs in IRA and taxable savings at about 0.8%, aside from checking account at probably 0.01% and some, presumably some low yielding treasuries in bond funds. Ultimately, I'd choose take some risk, such as an ultrashort bond fund, rather than pay someone in order to entice them into borrowing my money.
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Re: Negative Interest Rates: What's the Big Deal?

Post by jeffyscott »

zarci wrote: Sat Aug 08, 2020 9:53 am Serious question. If I buy a bond fund when the bond yield is -1%. I then keep holding and rebalancing from stocks (probably buying more bonds). When at a certain point in the future the bond rates rise again, that means the value of my fund rises no?


I would only lose money if;

1. The bond rate lowered further negative, and i sold
2. (Hypothetical) The bond rate stabilized at that initial negative rate forever.

]
If the yield (YTM less expenses) is -1% and stays there you are losing 1% per year.

If that falls further it means the the price has risen and you have a capital gain, which will offset some or all or more than all of the -1% per annum. But if YTM, is then -1.25% and stays there, you are losing 1.25% per year now.

If that rate rises, it means the bond price has fallen and you have a capital loss on top of the negative yield. However, if the YTM is now -0.75% and stays there, you are losing more slowly than before from that point forward.

The increase or decrease of the bond price results in the YTM of the bond, correspondingly, falling or rising, as a result of the price change.
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Re: Negative Interest Rates: What's the Big Deal?

Post by dkturner »

Rather than Endlessly speculate about this issue Are there any Europeans here? They have been living with negative interest rates for years. How did they react? What actually happened to their bond and bond fund market values?
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Re: Negative Interest Rates: What's the Big Deal?

Post by jeffyscott »

dkturner wrote: Sat Aug 08, 2020 10:24 am Rather than Endlessly speculate about this issue Are there any Europeans here? They have been living with negative interest rates for years. How did they react? What actually happened to their bond and bond fund market values?
I don't know about bond funds, but as JackoC indicated a few posts above and at the link below, they don't have to accept negative yields in bank accounts in Germany, etc. So there is an escape even there.

viewtopic.php?f=10&t=320918&p=5390677#p5390677
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Re: Negative Interest Rates: What's the Big Deal?

Post by Angst »

dkturner wrote: Sat Aug 08, 2020 10:24 am Rather than Endlessly speculate about this issue Are there any Europeans here? They have been living with negative interest rates for years. How did they react? What actually happened to their bond and bond fund market values?
They've posted here in other threads before in response to this same question, and the truth is a lot like what nisi alluded to above:
nisiprius wrote: Sat Aug 08, 2020 6:55 am Another possibility would be to some split system, in which small investors and household money had access to some system, not available to institutional investors, with a non-negative interest rate. How could this possibly happen? It already exists today in the differentials between FDIC-insured bank accounts, limited to $250,000, and Treasury bills. It also exists today in United States Savings Bonds, which are a fairly good deal, but essentially only available to small investors due to being limited to a total investment of $10,000 per person per year. I think an "entity" like a corporation can buy them but the limit, and the fact that savings bonds are not marketable, means we are not going to see a savings bond ETF any time soon.
Still it would be nice to hear again how people are handling it across the pond. I strongly expect that checking accounts w/o negative rates will continue to be available, low rate CD's will still be available... all of this up to a point, of course, but unless you're managing millions in bonds, there should generally be ways for most of us to avoid negative nominal rates, if we're ready to do a bit of work. That's my understanding of how much of it stands for people in parts of Europe with negative nominal rates.
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The Man with the Axe
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Re: Negative Interest Rates: What's the Big Deal?

Post by The Man with the Axe »

This is an excellent discussion. This is a critical issue for all of us. In this interest rate environment, where do we put the funds in our portfolio that aren't invested in equities?

Some observations from our own portfolio: We have moved some part of our fixed income allocation into Gold. We are holding more cash, in USD and other currencies.

We would welcome other creative solutions from the forum.
lyrictulip
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Re: Negative Interest Rates: What's the Big Deal?

Post by lyrictulip »

I expect that we will start to see the return of checking account fees long before banks dare to impose an officially negative interest rate on depositors.
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Re: Negative Interest Rates: What's the Big Deal?

Post by Robot Monster »

The Man with the Axe wrote: Sat Aug 08, 2020 11:46 am This is an excellent discussion. This is a critical issue for all of us. In this interest rate environment, where do we put the funds in our portfolio that aren't invested in equities?

Some observations from our own portfolio: We have moved some part of our fixed income allocation into Gold. We are holding more cash, in USD and other currencies.

We would welcome other creative solutions from the forum.
Oh, talk more about holding cash in other currencies. I've often thought about doing that.
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The Man with the Axe
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Re: Negative Interest Rates: What's the Big Deal?

Post by The Man with the Axe »

Robot Monster wrote: Sat Aug 08, 2020 12:36 pm
Oh, talk more about holding cash in other currencies. I've often thought about doing that.
[/quote]

Transaction costs are the challenge here. Currently we are using funds like these: FXA, FXC, FXE, FXF, FXY. But if someone else on the forum has identified a more cost-effective way to do this, we would love to hear about it.
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Re: Negative Interest Rates: What's the Big Deal?

Post by Teriyaki »

dkturner wrote: Sat Aug 08, 2020 10:24 am Rather than Endlessly speculate about this issue Are there any Europeans here? They have been living with negative interest rates for years. How did they react? What actually happened to their bond and bond fund market values?
European here. Unfortunately I can't tell you much about our bond funds as I don't invest in any bonds (because of the extremely low rates). As far as I understand, what nisiprius said is exactly correct: when you invest in a bond fund at a time when the corresponding rates are negative, be prepared to lose money (nominally) in the long run.

As for checking accounts, in my country (Finland) the checking accounts (and so-called "savings accounts") of all traditional banks are yielding essentially zero. There are some internet only banks that pay up to 1% interest. So no negative rates for non-institutional customers. Some banks have raised their various fees a bit, but there seems to be quite a bit of competition for customers so they haven't been able to raise fees all that much.

For institutional customers the situation is different. They are forced to accept negative rates on their cash. I heard one Finnish pension fund manager state that if rates went below -2%, they would consider switching to physical cash.
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Re: Negative Interest Rates: What's the Big Deal?

Post by Robot Monster »

The Man with the Axe wrote: Sat Aug 08, 2020 12:47 pm
Robot Monster wrote: Sat Aug 08, 2020 12:36 pm
Oh, talk more about holding cash in other currencies. I've often thought about doing that.
Transaction costs are the challenge here. Currently we are using funds like these: FXA, FXC, FXE, FXF, FXY. But if someone else on the forum has identified a more cost-effective way to do this, we would love to hear about it.
[/quote]

Yeah, not lovin' the expense ratios on those. Have you heard of,
https://www.tiaabank.com/investing/foreign-currencies
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The Man with the Axe
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Re: Negative Interest Rates: What's the Big Deal?

Post by The Man with the Axe »

Robot Monster wrote: Sat Aug 08, 2020 12:58 pm Have you heard of,
https://www.tiaabank.com/investing/foreign-currencies
Yes. We reviewed this option. We think the funds will have a lower cost because the TIAA product charges you a FX conversion fee on both ends of your trade:

From the TIAA website:

"Typically, our clients give us U.S. dollars and ask that we convert the funds into the foreign currency. When we do, we charge you a conversion cost or “spread,” which typically is a 1% or less markup over the wholesale exchange rate we are able to obtain from our institutional sources. The same charges will apply again if and when you later convert back to U.S. dollars or to any other currency."
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Re: Negative Interest Rates: What's the Big Deal?

Post by fredflinstone »

AlohaJoe wrote: Fri Aug 07, 2020 8:39 pm
fredflinstone wrote: Fri Aug 07, 2020 5:47 pm Serious question: How low would bond yields have to fall before you'd buy currency instead of bonds?
Where are you going to store your currency? At home? How big is the bond portfolio of your portfolio? $200,000? $500,000? That's a lot of cash to keep at home.
Yep. But you didn't answer my question. :wink:
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Re: Negative Interest Rates: What's the Big Deal?

Post by fredflinstone »

The Man with the Axe wrote: Sat Aug 08, 2020 11:46 am This is an excellent discussion. This is a critical issue for all of us. In this interest rate environment, where do we put the funds in our portfolio that aren't invested in equities?

Some observations from our own portfolio: We have moved some part of our fixed income allocation into Gold. We are holding more cash, in USD and other currencies.

We would welcome other creative solutions from the forum.
CDs still offer a positive yield in the US.
Stocks 28 / Gold 23 / Long-term US treasuries 19 / Cash (mainly CDs) 22 / TIPS 8
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Re: Negative Interest Rates: What's the Big Deal?

Post by White Coat Investor »

I've seen this movie before and I know how it ends. Those who stuck with typical bonds and cash preserved their value when it all came crashing down. Those who reached for yield lost more in principal than they gained in additional interest prior to the crash. #historymaynotrepeatbutitcertainlyrhymes
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 Interest Rates: What's the Big Deal?

Post by Maverick3320 »

bck63 wrote: Fri Aug 07, 2020 5:53 pm
JBTX wrote: Fri Aug 07, 2020 5:50 pm In most cases you lose money.

People complicate it, but it is really easy. If rates are negative, then all else equal, you lose money. Period. Speculating that rates *might* go down is just speculation.
Point taken. So what does one do? Someone who say, has all his retirement fixed income in intermediate term bonds? Or bonds in taxable (yes I have some bonds in taxable).
I think this is part of the reason why the stock market is currently at the level it is. Investors are chasing returns.
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Re: Negative Interest Rates: What's the Big Deal?

Post by jeffyscott »

White Coat Investor wrote: Sat Aug 08, 2020 1:42 pm I've seen this movie before and I know how it ends. Those who stuck with typical bonds and cash preserved their value when it all came crashing down. Those who reached for yield lost more in principal than they gained in additional interest prior to the crash. #historymaynotrepeatbutitcertainlyrhymes
Well, most of the comments have suggested "reaching" via I-bonds, EE bonds, CDs, and savings accounts. None of those risk losing any principal, while offering yields that are far better than treasury bonds.

It's actually those who would stick with treasuries that are counting on further interest rate declines or some sort of rebalancing bonus to offset the lower yields when compared to the safe alternatives that many have suggested.
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Re: Negative Interest Rates: What's the Big Deal?

Post by dziuniek »

Flips your 0% bonds or negative interest bonds into real estate?

Wondering if there's any information on real estate in Europe following them going to zero. Bettter yet, what about Japan RE ?
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Re: Negative Interest Rates: What's the Big Deal?

Post by JackoC »

Robot Monster wrote: Sat Aug 08, 2020 12:58 pm
The Man with the Axe wrote: Sat Aug 08, 2020 12:47 pm
Robot Monster wrote: Sat Aug 08, 2020 12:36 pm
Oh, talk more about holding cash in other currencies. I've often thought about doing that.
Transaction costs are the challenge here. Currently we are using funds like these: FXA, FXC, FXE, FXF, FXY. But if someone else on the forum has identified a more cost-effective way to do this, we would love to hear about it.
Yeah, not lovin' the expense ratios on those. Have you heard of,
https://www.tiaabank.com/investing/foreign-currencies
[/quote]
The two fundamental problem generally:
a) there's significant risk from USD POV of holding foreign currencies. Even if the yield was higher it would not be anything like how a 1% online FDIC insured savings account is better than 0.1% in VMFXX.
b) at the moment all other DM's have official short term benchmark interest rates too close to zero (or negative) for any US institution to pay you anywhere near as much on DM FX cash as you could get in a online savings account.

If somebody wanted to hold FX cash to hedge against a decline in FX value of USD, the most efficient way is as was just mentioned, a broker who will give you a good FX rate and let you hold the FX in your account for no further fee, and possible interest. But as of now it is not a way to earn extra interest. The FX ETF's don't make any sense that I can see, for any purpose.

Interactive Brokers gives good FX rates, and you can readily see their interest rate v 'benchmark' and what the benchmark rate is in various currencies the two links. Problem is you get zero or negative interest on FX cash in every developed market currency. You could get positive interest on some emerging market currencies, but that gets back to point a), different risk than USD cash, only more so.
https://www.interactivebrokers.com/en/i ... =46385&p=i
https://www.interactivebrokers.com/en/i ... =46383&p=i

If you want EM currency exposure the way to go IMO is EM local currency government bond ETF like EMLC. I have small allocation to this, positive carry (yield higher than DM govt bonds) and I believe in some eventual tendency toward Purchasing Power Parity convergence (ie EM currency appreciation v USD). But, this is *NOT* a substitute for FDIC insured USD cash, CD or US govt bonds. It's closer to the risk of stocks. And starting at the fund's inception in 2010 it's been a pretty lousy idea, 0.67% pa return inception to date. I believe it will be a better idea from now, but again the risk even of holding DM currencies is not comparable to USD in the bank, and this is very different.
Last edited by JackoC on Sat Aug 08, 2020 5:07 pm, edited 2 times in total.
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Re: Negative Interest Rates: What's the Big Deal?

Post by JackoC »

duplicate.
daacrusher2001
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Re: Negative Interest Rates: What's the Big Deal?

Post by daacrusher2001 »

7eight9 wrote: Fri Aug 07, 2020 11:27 pm
bck63 wrote: Fri Aug 07, 2020 5:53 pm
JBTX wrote: Fri Aug 07, 2020 5:50 pm In most cases you lose money.

People complicate it, but it is really easy. If rates are negative, then all else equal, you lose money. Period. Speculating that rates *might* go down is just speculation.
Point taken. So what does one do? Someone who say, has all his retirement fixed income in intermediate term bonds? Or bonds in taxable (yes I have some bonds in taxable).
In lieu of (or in addition to) bonds one might considering multi-year guaranteed annuities (MYGAs).

Example --- Fixed Annuity Rates for August 2020 ---https://www.blueprintincome.com/fixed-annuities

Five year rates as high as 3.45% per above link.
Never heard of MYGAs...what are the main risks?
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