Negative Interest Rates in U.S.

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Seasonal
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Re: Negative Interest Rates in U.S.

Post by Seasonal » Tue Aug 13, 2019 6:44 am

sperry8 wrote:
Mon Aug 12, 2019 5:01 pm
Prahasaurus wrote:
Mon Aug 12, 2019 8:00 am
bgf wrote:
Sun Aug 11, 2019 11:32 am
if rates go to zero, then stocks are very cheap.
So we should all be investing in European stocks, right? Or are rates there below zero because some of their largest economies (UK, Germany, Italy) are in recession? And what happens to US stocks when the US enters recession, as well? Or is thought to be entering one?
Good question. And Japanese stocks too? Since I too have heard everyone saying if rates are going to 0 then stocks are very cheap. And yet they are 0 in Europe and European stocks have not done as well (at least priced in dollars, unhedged). Perhaps in local currencies they've kept pace with the S&P but I doubt it. So if it doesn't work in Europe (that of being cheap there when rates are at 0) or Japan - why should it work here in the US?
A customary way to value stocks is that they are worth the net present value of future cash flows (earnings or dividends). All else being equal, NPV is higher if rates are lower. However, all else isn't necessarily equal. If rates are low because the economy is poor, then cash flow are likely to be lower. The negative effects of lower cash flows may outweigh the positive effects of lower rates.

Low rates also make bonds less attractive, making stocks relatively more attractive. Low rates might encourage more business investment, leading to more cash flows. Low rates might be the result of businesses not wanting to borrow due to the lack of attractive investments.

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JoMoney
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Re: Negative Interest Rates in U.S.

Post by JoMoney » Wed Aug 14, 2019 8:07 am

This recent article has some interesting quotes from former Fed chief Allan Greenspan on low and possible negative rates in the U.S.
https://www.marketwatch.com/story/ex-fe ... 2019-08-13
https://www.bloomberg.com/news/articles ... ury-yields
...[Fels] postulated that extended life expectancy and an aging population have caused people to value future consumption more than current spending.

Greenspan, 93, said he views Fels’s thesis as very plausible and also a reason why more debt has a yield below zero. He doesn’t think it will last forever.

“Why people continue to buy long-term Treasuries at such low yields may be also due to forces having altered people’s time preferences,” Greenspan said. “But there is hundreds of years of history showing the long-term stability in time preference, so these changes won’t be forever.”
"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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J G Bankerton
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Re: Negative Interest Rates in U.S.

Post by J G Bankerton » Wed Aug 14, 2019 8:24 am

JoMoney wrote:
Wed Aug 14, 2019 8:07 am
“Why people continue to buy long-term Treasuries at such low yields may be also due to forces having altered people’s time preferences,”
With negative rates bonds become a commodity play not a stable source of income. Some people like to "play" the market.

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JoMoney
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Re: Negative Interest Rates in U.S.

Post by JoMoney » Wed Aug 14, 2019 8:38 am

J G Bankerton wrote:
Wed Aug 14, 2019 8:24 am
JoMoney wrote:
Wed Aug 14, 2019 8:07 am
“Why people continue to buy long-term Treasuries at such low yields may be also due to forces having altered people’s time preferences,”
With negative rates bonds become a commodity play not a stable source of income. Some people like to "play" the market.
Interest as a "stable source of income" has typically been a bit of an illusion in real terms.
In some belief systems, money earning money just for having it (and not bearing equitable economic risk) is tantamount to a sin... so is gambling/gaming money to try and profit from "playing" with it.
"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 Valuethinker » Wed Aug 14, 2019 9:25 am

JoMoney wrote:
Wed Aug 14, 2019 8:07 am
This recent article has some interesting quotes from former Fed chief Allan Greenspan on low and possible negative rates in the U.S.
https://www.marketwatch.com/story/ex-fe ... 2019-08-13
https://www.bloomberg.com/news/articles ... ury-yields
...[Fels] postulated that extended life expectancy and an aging population have caused people to value future consumption more than current spending.

Greenspan, 93, said he views Fels’s thesis as very plausible and also a reason why more debt has a yield below zero. He doesn’t think it will last forever.

“Why people continue to buy long-term Treasuries at such low yields may be also due to forces having altered people’s time preferences,” Greenspan said. “But there is hundreds of years of history showing the long-term stability in time preference, so these changes won’t be forever.”
Although what has altered is life expectancies. Even if the long run is for a return to normal time preferences, western societies (especially the Anglosphere) are absorbing an unusually large generation relative to its predecessor and successor generations, which is aging rapidly.

It will be a while before we are static on this, right now we are in the dynamics of a major transformation across the developed world -and virtually every country is going through it.

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J G Bankerton
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Re: Negative Interest Rates in U.S.

Post by J G Bankerton » Wed Aug 14, 2019 9:53 am

JoMoney wrote:
Wed Aug 14, 2019 8:38 am
Interest as a "stable source of income" has typically been a bit of an illusion in real terms.
In some belief systems, money earning money just for having it (and not bearing equitable economic risk) is tantamount to a sin... so is gambling/gaming money to try and profit from "playing" with it.
At least the bond sin is taxed as regular income. The sin of stock dividends gets special treatment. I don't make the rules, I only play the game.

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Negative interest rates

Post by squirm » Wed Aug 14, 2019 11:12 am

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

This can't be good when there's over 15 trillion in negative rates already. What does that mean in the longer term? Why aren't the investors just putting the money in money markets? I believe they're trying to get the gains in the net value.
But overall this can't be good, perhaps we're trending down the road Japan has been in.

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Re: Negative interest rates

Post by abuss368 » Wed Aug 14, 2019 11:13 am

Many countries in Europe have had negative rates for years.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!"

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Re: Negative interest rates

Post by squirm » Wed Aug 14, 2019 1:13 pm

abuss368 wrote:
Wed Aug 14, 2019 11:13 am
Many countries in Europe have had negative rates for years.
And those European banks are just doing great. Wonder when DB folds.

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Re: Negative interest rates

Post by abuss368 » Wed Aug 14, 2019 2:06 pm

squirm wrote:
Wed Aug 14, 2019 1:13 pm
abuss368 wrote:
Wed Aug 14, 2019 11:13 am
Many countries in Europe have had negative rates for years.
And those European banks are just doing great. Wonder when DB folds.
DB?
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!"

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Re: Negative interest rates

Post by HockeyFan99 » Wed Aug 14, 2019 2:09 pm

DB = Deutsche Bank
"I'm spending a year dead for tax reasons." - Hotblack Desiato

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

Post by Phineas J. Whoopee » Wed Aug 14, 2019 4:19 pm

sarabayo wrote:
Mon Aug 12, 2019 4:05 pm
J G Bankerton wrote:
Mon Aug 12, 2019 10:03 am
There is a Chinese curse which says “May he live in interesting times.”
There is no such "Chinese curse". See https://quoteinvestigator.com/2015/12/18/live/. I don't know why English speakers are so fond of fabricating "ancient wisdom" from other cultures... I've never seen anyone quote an "ancient English curse"!
How about, but I just made it up:

May you invent non-existent cultures, attribute them to people you know nothing about, then appropriate from the pretend cultures and be called out in public.

Any good? It'll be 1500 years old in 3519.

PJW

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Re: Negative Interest Rates in U.S.

Post by LadyGeek » Wed Aug 14, 2019 5:30 pm

I merged squirm's thread into the on-going discussion.
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Re: Negative Interest Rates in U.S.

Post by susa » Sat Aug 17, 2019 6:53 am

A recent video that explains it well, starts at about 13 minute mark, at 17 minutes the banking side

youtube.com/watch?time_continue=779&v=UxYlirjUwro

TBillT
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Re: Negative Interest Rates in U.S.

Post by TBillT » Sun Aug 18, 2019 3:20 pm

I had a chance to hear A. Gary Shilling's first thoughts on Friday, on-line.

Basically he is thinking 2% is still the fundamental long bond bottom, but right now we have foreign money coming in making the momentum to lower interest. Shilling is good at following momentum, so he will follow the momentum until he sees the freight train moving back. Now then if Trump really screws everything up with the trade wars, there could be bigger recession than Shillings currently sees, and then all bets are off as far as the low side.

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J G Bankerton
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Re: Negative Interest Rates in U.S.

Post by J G Bankerton » Sun Aug 18, 2019 3:44 pm

TBillT wrote:
Sun Aug 18, 2019 3:20 pm
I had a chance to hear A. Gary Shilling's first thoughts on Friday, on-line.
My portfolio has done just fine over the last two and a half years. I'm staying long VTI.

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Re: Negative Interest Rates in U.S.

Post by prioritarian » Sun Aug 18, 2019 7:09 pm

Kevin M wrote:
Sun Aug 11, 2019 7:32 pm
If anyone really thinks we're headed for 0% long-term Treasury yields any time in the near future, they should load up on 30-year zero-coupon bonds. A drop from 2% to 0% results in an 81% return. That'll make up for many years of small negative returns.

Kevin
Exactly. Long-term holders of Japanese bonds made bank.

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Re: Negative Interest Rates in U.S.

Post by prioritarian » Sun Aug 18, 2019 7:17 pm

J G Bankerton wrote:
Wed Aug 14, 2019 8:24 am
JoMoney wrote:
Wed Aug 14, 2019 8:07 am
“Why people continue to buy long-term Treasuries at such low yields may be also due to forces having altered people’s time preferences,”
With negative rates bonds become a commodity play not a stable source of income. Some people like to "play" the market.
I buy long-term treasury funds because they are negatively correlated with stocks (diversification) and because their value goes up when yields go down (protection against disinflation).

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J G Bankerton
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Re: Negative Interest Rates in U.S.

Post by J G Bankerton » Sun Aug 18, 2019 7:31 pm

prioritarian wrote:
Sun Aug 18, 2019 7:17 pm

I buy long-term treasury funds because they are negatively correlated with stocks (diversification) and because their value goes up when yields go down (protection against disinflation).
Will you continue to buy them if you have to pay to hold them? I couldn't afford to do that.

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Re: Negative Interest Rates in U.S.

Post by HEDGEFUNDIE » Sun Aug 18, 2019 7:34 pm

J G Bankerton wrote:
Sun Aug 18, 2019 7:31 pm
prioritarian wrote:
Sun Aug 18, 2019 7:17 pm

I buy long-term treasury funds because they are negatively correlated with stocks (diversification) and because their value goes up when yields go down (protection against disinflation).
Will you continue to buy them if you have to pay to hold them? I couldn't afford to do that.
You pay for all kinds of other insurance (auto, house, medical). Why not portfolio insurance?

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305pelusa
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Re: Negative Interest Rates in U.S.

Post by 305pelusa » Sun Aug 18, 2019 8:33 pm

HEDGEFUNDIE wrote:
Sun Aug 18, 2019 7:34 pm
J G Bankerton wrote:
Sun Aug 18, 2019 7:31 pm
prioritarian wrote:
Sun Aug 18, 2019 7:17 pm

I buy long-term treasury funds because they are negatively correlated with stocks (diversification) and because their value goes up when yields go down (protection against disinflation).
Will you continue to buy them if you have to pay to hold them? I couldn't afford to do that.
You pay for all kinds of other insurance (auto, house, medical). Why not portfolio insurance?
To the people willing to pay money to hold bonds in the hopes they "protect" your stocks: You might be better off with actual portfolio insurance (aka puts).

HEDGEFUNDIE
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Re: Negative Interest Rates in U.S.

Post by HEDGEFUNDIE » Sun Aug 18, 2019 9:36 pm

305pelusa wrote:
Sun Aug 18, 2019 8:33 pm
HEDGEFUNDIE wrote:
Sun Aug 18, 2019 7:34 pm
J G Bankerton wrote:
Sun Aug 18, 2019 7:31 pm
prioritarian wrote:
Sun Aug 18, 2019 7:17 pm

I buy long-term treasury funds because they are negatively correlated with stocks (diversification) and because their value goes up when yields go down (protection against disinflation).
Will you continue to buy them if you have to pay to hold them? I couldn't afford to do that.
You pay for all kinds of other insurance (auto, house, medical). Why not portfolio insurance?
To the people willing to pay money to hold bonds in the hopes they "protect" your stocks: You might be better off with actual portfolio insurance (aka puts).
I would love to see a historical cost-reward comparison of puts vs LTT.

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305pelusa
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Re: Negative Interest Rates in U.S.

Post by 305pelusa » Sun Aug 18, 2019 9:42 pm

HEDGEFUNDIE wrote:
Sun Aug 18, 2019 9:36 pm
305pelusa wrote:
Sun Aug 18, 2019 8:33 pm
HEDGEFUNDIE wrote:
Sun Aug 18, 2019 7:34 pm
J G Bankerton wrote:
Sun Aug 18, 2019 7:31 pm
prioritarian wrote:
Sun Aug 18, 2019 7:17 pm

I buy long-term treasury funds because they are negatively correlated with stocks (diversification) and because their value goes up when yields go down (protection against disinflation).
Will you continue to buy them if you have to pay to hold them? I couldn't afford to do that.
You pay for all kinds of other insurance (auto, house, medical). Why not portfolio insurance?
To the people willing to pay money to hold bonds in the hopes they "protect" your stocks: You might be better off with actual portfolio insurance (aka puts).
I would love to see a historical cost-reward comparison of puts vs LTT.
I'm suggesting paying for portfolio insurance via puts instead of paying for "portfolio insurance" via Bonds with negative rates. Since rates have never been negative, I'm not sure what you're talking about.

HEDGEFUNDIE
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Re: Negative Interest Rates in U.S.

Post by HEDGEFUNDIE » Sun Aug 18, 2019 9:44 pm

305pelusa wrote:
Sun Aug 18, 2019 9:42 pm
HEDGEFUNDIE wrote:
Sun Aug 18, 2019 9:36 pm
305pelusa wrote:
Sun Aug 18, 2019 8:33 pm
HEDGEFUNDIE wrote:
Sun Aug 18, 2019 7:34 pm
J G Bankerton wrote:
Sun Aug 18, 2019 7:31 pm
Will you continue to buy them if you have to pay to hold them? I couldn't afford to do that.
You pay for all kinds of other insurance (auto, house, medical). Why not portfolio insurance?
To the people willing to pay money to hold bonds in the hopes they "protect" your stocks: You might be better off with actual portfolio insurance (aka puts).
I would love to see a historical cost-reward comparison of puts vs LTT.
I'm suggesting paying for portfolio insurance via puts instead of paying for "portfolio insurance" via Bonds with negative rates. Since rates have never been negative, I'm not sure what you're talking about.
I know exactly what you’re taking about.

And yes, rates have never been negative. That’s my point.

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305pelusa
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Re: Negative Interest Rates in U.S.

Post by 305pelusa » Sun Aug 18, 2019 9:52 pm

HEDGEFUNDIE wrote:
Sun Aug 18, 2019 9:44 pm
305pelusa wrote:
Sun Aug 18, 2019 9:42 pm
HEDGEFUNDIE wrote:
Sun Aug 18, 2019 9:36 pm
305pelusa wrote:
Sun Aug 18, 2019 8:33 pm
HEDGEFUNDIE wrote:
Sun Aug 18, 2019 7:34 pm


You pay for all kinds of other insurance (auto, house, medical). Why not portfolio insurance?
To the people willing to pay money to hold bonds in the hopes they "protect" your stocks: You might be better off with actual portfolio insurance (aka puts).
I would love to see a historical cost-reward comparison of puts vs LTT.
I'm suggesting paying for portfolio insurance via puts instead of paying for "portfolio insurance" via Bonds with negative rates. Since rates have never been negative, I'm not sure what you're talking about.
I know exactly what you’re taking about.

And yes, rates have never been negative. That’s my point.
Your point was that treasuries would be worth holding at negative rates even just as portfolio insurance. My point is that if you're going to actually pay money for protection, then get yourself something that actually protects.

HEDGEFUNDIE
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Re: Negative Interest Rates in U.S.

Post by HEDGEFUNDIE » Sun Aug 18, 2019 9:54 pm

305pelusa wrote:
Sun Aug 18, 2019 9:52 pm
HEDGEFUNDIE wrote:
Sun Aug 18, 2019 9:44 pm
305pelusa wrote:
Sun Aug 18, 2019 9:42 pm
HEDGEFUNDIE wrote:
Sun Aug 18, 2019 9:36 pm
305pelusa wrote:
Sun Aug 18, 2019 8:33 pm


To the people willing to pay money to hold bonds in the hopes they "protect" your stocks: You might be better off with actual portfolio insurance (aka puts).
I would love to see a historical cost-reward comparison of puts vs LTT.
I'm suggesting paying for portfolio insurance via puts instead of paying for "portfolio insurance" via Bonds with negative rates. Since rates have never been negative, I'm not sure what you're talking about.
I know exactly what you’re taking about.

And yes, rates have never been negative. That’s my point.
Your point was that treasuries would be worth holding at negative rates even just as portfolio insurance. My point is that if you're going to actually pay money for protection, then get yourself something that actually protects.
When you buy a put option it either pays off if the market goes down or doesn’t if the market goes up. When you buy a Treasury bond it pays off either way.

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305pelusa
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Re: Negative Interest Rates in U.S.

Post by 305pelusa » Sun Aug 18, 2019 9:58 pm

HEDGEFUNDIE wrote:
Sun Aug 18, 2019 9:54 pm
305pelusa wrote:
Sun Aug 18, 2019 9:52 pm
HEDGEFUNDIE wrote:
Sun Aug 18, 2019 9:44 pm
305pelusa wrote:
Sun Aug 18, 2019 9:42 pm
HEDGEFUNDIE wrote:
Sun Aug 18, 2019 9:36 pm


I would love to see a historical cost-reward comparison of puts vs LTT.
I'm suggesting paying for portfolio insurance via puts instead of paying for "portfolio insurance" via Bonds with negative rates. Since rates have never been negative, I'm not sure what you're talking about.
I know exactly what you’re taking about.

And yes, rates have never been negative. That’s my point.
Your point was that treasuries would be worth holding at negative rates even just as portfolio insurance. My point is that if you're going to actually pay money for protection, then get yourself something that actually protects.
When you buy a put option it either pays off if the market goes down or doesn’t if the market goes up. When you buy a Treasury bond it pays off either way.
If the rate is negative, you'll generally lose money on the bond too.

HEDGEFUNDIE
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Re: Negative Interest Rates in U.S.

Post by HEDGEFUNDIE » Sun Aug 18, 2019 10:08 pm

305pelusa wrote:
Sun Aug 18, 2019 9:58 pm
HEDGEFUNDIE wrote:
Sun Aug 18, 2019 9:54 pm
305pelusa wrote:
Sun Aug 18, 2019 9:52 pm
HEDGEFUNDIE wrote:
Sun Aug 18, 2019 9:44 pm
305pelusa wrote:
Sun Aug 18, 2019 9:42 pm


I'm suggesting paying for portfolio insurance via puts instead of paying for "portfolio insurance" via Bonds with negative rates. Since rates have never been negative, I'm not sure what you're talking about.
I know exactly what you’re taking about.

And yes, rates have never been negative. That’s my point.
Your point was that treasuries would be worth holding at negative rates even just as portfolio insurance. My point is that if you're going to actually pay money for protection, then get yourself something that actually protects.
When you buy a put option it either pays off if the market goes down or doesn’t if the market goes up. When you buy a Treasury bond it pays off either way.
If the rate is negative, you'll generally lose money on the bond too.
Which it never has been!

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305pelusa
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Re: Negative Interest Rates in U.S.

Post by 305pelusa » Sun Aug 18, 2019 10:14 pm

HEDGEFUNDIE wrote:
Sun Aug 18, 2019 10:08 pm
305pelusa wrote:
Sun Aug 18, 2019 9:58 pm
HEDGEFUNDIE wrote:
Sun Aug 18, 2019 9:54 pm
305pelusa wrote:
Sun Aug 18, 2019 9:52 pm
HEDGEFUNDIE wrote:
Sun Aug 18, 2019 9:44 pm


I know exactly what you’re taking about.

And yes, rates have never been negative. That’s my point.
Your point was that treasuries would be worth holding at negative rates even just as portfolio insurance. My point is that if you're going to actually pay money for protection, then get yourself something that actually protects.
When you buy a put option it either pays off if the market goes down or doesn’t if the market goes up. When you buy a Treasury bond it pays off either way.
If the rate is negative, you'll generally lose money on the bond too.
Which it never has been!
Let's try one more time:

IF rates ever become negative (making bonds a loss of capital in investment) and you're considering holding them just as portfolio insurance, THEN consider actual portfolio insurance (puts) instead.

The fact that rates have never been negative is totally irrelevant to the above statement.

prioritarian
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Re: Negative Interest Rates in U.S.

Post by prioritarian » Sun Aug 18, 2019 11:32 pm

305pelusa wrote:
Sun Aug 18, 2019 9:42 pm
I'm suggesting paying for portfolio insurance via puts instead of paying for "portfolio insurance" via Bonds with negative rates. Since rates have never been negative, I'm not sure what you're talking about.
My long-term bond funds have an ER of 0.03. Puts are a more expensive and time-intensive form of "protection".

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Re: Negative Interest Rates in U.S.

Post by HawkeyePierce » Sun Aug 18, 2019 11:41 pm

prioritarian wrote:
Sun Aug 18, 2019 11:32 pm
305pelusa wrote:
Sun Aug 18, 2019 9:42 pm
I'm suggesting paying for portfolio insurance via puts instead of paying for "portfolio insurance" via Bonds with negative rates. Since rates have never been negative, I'm not sure what you're talking about.
My long-term bond funds have an ER of 0.03. Puts are a more expensive and time-intensive form of "protection".
LTTs are certainly cheaper and easier to implement.

According to this article buying monthly protective put options on the S&P500 (via SPY) would cost 7.4% of your SPY position, essentially canceling out gains most years. An LTT fund costs just a couple basis points a year and requires no management.

https://www.etf.com/sections/features-a ... nopaging=1

MoneyMarathon
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Re: Negative Interest Rates in U.S.

Post by MoneyMarathon » Mon Aug 19, 2019 12:05 am

LTTs are cheap and easy because, at the end of the day, they're still speculative as "stock portfolio insurance." You're still being compensated for taking the risk that they aren't actually that kind of "insurance" in every single bear market. Even as recently as 2008, Swedroe was writing that stocks and bonds are positively correlated and that your best insurance for both would be commodities, which are (fortunately) also equity like in volatility and returns.
:oops:

Now if only someone would have told a smart guy like him that LTTs were sure-thing insurance in 2008 (and that little business of subprime lending issues wasn't a 2007 problem already in the rear view mirror). A lot of people would have appreciated that tip, at the time. He could have written a much shorter book on alternatives in 2008, and it would have just one page: "Long term treasuries will pay you to hold them and always go up in a bear market, so just buy them. The end." He didn't write that book; people at the time didn't yet "know" that long term treasuries always go up in a bear market. It's a good question whether they "know" that now. :?:

nps
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Re: Negative Interest Rates in U.S.

Post by nps » Mon Aug 19, 2019 6:09 am

Watty wrote:
Mon Aug 12, 2019 9:01 am
What may be the catallactic consequences ?
If interest rates are negative then it would make sense for someone to start up an ETF that stores paper cash just like there are ETFs that keep gold and silver in a vault. I would guess that these might have an expense ratio of around 0.3%(???) which would be a lower limit on how far negative interest rates could go. Keeping paper cash in a home safe or safety deposit box would be tempting. Nations like China which have a lot of US funds might keep cash instead of US government bonds.

This would have several effects;

a) There would be a limit on how far negative rates could go. That would mean that there would be no possibility that a bond could increase in value if rates go down more. The main reason that I own bonds is to make my portfolio less volatile because bonds often will go up when stock go down. With no upward potential that would take away the main reason that I own bonds.

b) All that cash stored in vaults by people and ETFs would impact the economic money supply and money velocity numbers. I don't know enough about it to interpret what that would mean but not only would it skew the numbers at first but as soon as interest rates improve and get positive all that paper cash would be put back into circulation at about the same time.
Agree, the existence of physical cash creates a natural interest rate floor. If we happen to get to a "cashless society," this would no longer be limited.

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J G Bankerton
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Re: Negative Interest Rates in U.S.

Post by J G Bankerton » Mon Aug 19, 2019 6:42 am

HEDGEFUNDIE wrote:
Sun Aug 18, 2019 7:34 pm
J G Bankerton wrote:
Sun Aug 18, 2019 7:31 pm
prioritarian wrote:
Sun Aug 18, 2019 7:17 pm

I buy long-term treasury funds because they are negatively correlated with stocks (diversification) and because their value goes up when yields go down (protection against disinflation).
Will you continue to buy them if you have to pay to hold them? I couldn't afford to do that.
You pay for all kinds of other insurance (auto, house, medical). Why not portfolio insurance?
Buying life insurance for an infant is a waste of money.

columbia
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Re: Negative Interest Rates in U.S.

Post by columbia » Mon Aug 19, 2019 7:49 am

If interest rates were negative, why take the risk of them then rising? It seems that even a negative rate money market account would be a better option than bonds, until short term treasuries go above 0%.

I’m sure there’s a flaw in my logic. :P

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305pelusa
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Re: Negative Interest Rates in U.S.

Post by 305pelusa » Mon Aug 19, 2019 7:51 am

HawkeyePierce wrote:
Sun Aug 18, 2019 11:41 pm
prioritarian wrote:
Sun Aug 18, 2019 11:32 pm
305pelusa wrote:
Sun Aug 18, 2019 9:42 pm
I'm suggesting paying for portfolio insurance via puts instead of paying for "portfolio insurance" via Bonds with negative rates. Since rates have never been negative, I'm not sure what you're talking about.
My long-term bond funds have an ER of 0.03. Puts are a more expensive and time-intensive form of "protection".
LTTs are certainly cheaper and easier to implement.

According to this article buying monthly protective put options on the S&P500 (via SPY) would cost 7.4% of your SPY position, essentially canceling out gains most years. An LTT fund costs just a couple basis points a year and requires no management.

https://www.etf.com/sections/features-a ... nopaging=1
First of all, put costs depend on how much protection (strike price) you want. Just like every other type of insurance ever. So quoting what one person is doing as representative of the strategy makes no sense.

Secondly, I'm talking about when interest rates are NEGATIVE. So if rates were negative, you might find it is far cheaper to insure your portfolio with real insurance (puts) than with something you hope insures but in no way is guaranteed (negative rate bonds). EDIT: Because at that point, your bonds might cost you more than just the ER.

But people keep quoting figures when rates are positive and asking for backtests when they're positive. :oops:

HawkeyePierce
Posts: 529
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Re: Negative Interest Rates in U.S.

Post by HawkeyePierce » Mon Aug 19, 2019 9:52 pm

305pelusa wrote:
Mon Aug 19, 2019 7:51 am
HawkeyePierce wrote:
Sun Aug 18, 2019 11:41 pm
prioritarian wrote:
Sun Aug 18, 2019 11:32 pm
305pelusa wrote:
Sun Aug 18, 2019 9:42 pm
I'm suggesting paying for portfolio insurance via puts instead of paying for "portfolio insurance" via Bonds with negative rates. Since rates have never been negative, I'm not sure what you're talking about.
My long-term bond funds have an ER of 0.03. Puts are a more expensive and time-intensive form of "protection".
LTTs are certainly cheaper and easier to implement.

According to this article buying monthly protective put options on the S&P500 (via SPY) would cost 7.4% of your SPY position, essentially canceling out gains most years. An LTT fund costs just a couple basis points a year and requires no management.

https://www.etf.com/sections/features-a ... nopaging=1
First of all, put costs depend on how much protection (strike price) you want. Just like every other type of insurance ever. So quoting what one person is doing as representative of the strategy makes no sense.

Secondly, I'm talking about when interest rates are NEGATIVE. So if rates were negative, you might find it is far cheaper to insure your portfolio with real insurance (puts) than with something you hope insures but in no way is guaranteed (negative rate bonds). EDIT: Because at that point, your bonds might cost you more than just the ER.

But people keep quoting figures when rates are positive and asking for backtests when they're positive. :oops:
This paper from AQR suggests that the path dependence of protective puts significantly erodes their value as insurance.

https://www.aqr.com/Insights/Research/W ... ctive-Puts
For those who are concerned about their equity’s downside risk, reducing their equity position is significantly more effective than buying protection. Sized to achieve the same average return, divesting has lower drawdowns, lower volatility, lower equity beta, and a higher Sharpe ratio than does buying put options.
This paper uses cash rather than bonds as the divested asset.

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whodidntante
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Re: Negative Interest Rates in U.S.

Post by whodidntante » Mon Aug 19, 2019 10:17 pm

unclescrooge wrote:
Tue Aug 13, 2019 6:23 am

Right, I was going back over 1500 years. Some ancient cultures trace their history back 5,000 years. English wasn't really a language back then.
False. Star Wars is clearly in English. And it wasn't just a long time ago, it was a long, long time ago. :happy

MotoTrojan
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Re: Negative Interest Rates in U.S.

Post by MotoTrojan » Mon Aug 19, 2019 10:32 pm

Kevin M wrote:
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?

Kevin
Can you help me understand your point? When the EFFR was 0.1%-0.4% wouldn't it make more sense to have such low yields, and thus less reason for concern? Isn't it more concerning that long rates are so low now with the EFFR at a much higher level?

Appreciate your insight into what I am missing.

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unclescrooge
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Re: Negative Interest Rates in U.S.

Post by unclescrooge » Tue Aug 20, 2019 12:25 am

whodidntante wrote:
Mon Aug 19, 2019 10:17 pm
unclescrooge wrote:
Tue Aug 13, 2019 6:23 am

Right, I was going back over 1500 years. Some ancient cultures trace their history back 5,000 years. English wasn't really a language back then.
False. Star Wars is clearly in English. And it wasn't just a long time ago, it was a long, long time ago. :happy
That's incorrect. It was in a galaxy far, far away. :mrgreen:

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305pelusa
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Re: Negative Interest Rates in U.S.

Post by 305pelusa » Tue Aug 20, 2019 9:08 am

HawkeyePierce wrote:
Mon Aug 19, 2019 9:52 pm
305pelusa wrote:
Mon Aug 19, 2019 7:51 am
HawkeyePierce wrote:
Sun Aug 18, 2019 11:41 pm
prioritarian wrote:
Sun Aug 18, 2019 11:32 pm
305pelusa wrote:
Sun Aug 18, 2019 9:42 pm
I'm suggesting paying for portfolio insurance via puts instead of paying for "portfolio insurance" via Bonds with negative rates. Since rates have never been negative, I'm not sure what you're talking about.
My long-term bond funds have an ER of 0.03. Puts are a more expensive and time-intensive form of "protection".
LTTs are certainly cheaper and easier to implement.

According to this article buying monthly protective put options on the S&P500 (via SPY) would cost 7.4% of your SPY position, essentially canceling out gains most years. An LTT fund costs just a couple basis points a year and requires no management.

https://www.etf.com/sections/features-a ... nopaging=1
First of all, put costs depend on how much protection (strike price) you want. Just like every other type of insurance ever. So quoting what one person is doing as representative of the strategy makes no sense.

Secondly, I'm talking about when interest rates are NEGATIVE. So if rates were negative, you might find it is far cheaper to insure your portfolio with real insurance (puts) than with something you hope insures but in no way is guaranteed (negative rate bonds). EDIT: Because at that point, your bonds might cost you more than just the ER.

But people keep quoting figures when rates are positive and asking for backtests when they're positive. :oops:
This paper from AQR suggests that the path dependence of protective puts significantly erodes their value as insurance.

https://www.aqr.com/Insights/Research/W ... ctive-Puts
For those who are concerned about their equity’s downside risk, reducing their equity position is significantly more effective than buying protection. Sized to achieve the same average return, divesting has lower drawdowns, lower volatility, lower equity beta, and a higher Sharpe ratio than does buying put options.
This paper uses cash rather than bonds as the divested asset.
You bring up a fine point but let's clarify a couple of things:
1) That paper is ONE implementation of put protection. You spend 1% a month to break even with a 6% loss in a month. That's a lot of money in insurance a year. I would "raise my deductible"; buy cheaper puts that last longer than a month.
2) The alternative strategy uses cash. Cash has earned a positive return historically. I would only recommend this if cash/bonds were to earn negative rates. This would make their alternative strategy less desirable.
3) Most importantly, the whole point of buying puts is to maintain upside participation. If I didn't care about that, then I'd just sell calls as well to finance those puts. That would be equivalent to shorting the market. If I have some long positions and some short positions, that's equivalent to being neutral (I.e. cash).

So their stock/cash strategy obviously returns more. It obtains downside protection by maintaining less beta. You should compare this against someone buying puts AND selling calls with 100% in equities.

He has a paragraph comparing the two strategies in terms of upside participation, and the put strategy is clearly much better. It's more volatile, yes, but who cares about volatility as long as you have drawdown protection?

4) Just to be clear, I would not buy insurance for my portfolio. I would derisk like this recommends first. But if I WERE to buy insurance in the form of negative yielding bonds or cash, I would strongly consider puts as well.

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

Post by Kevin M » Tue Aug 20, 2019 2:22 pm

MotoTrojan wrote:
Mon Aug 19, 2019 10:32 pm
Kevin M wrote:
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?

Kevin
Can you help me understand your point? When the EFFR was 0.1%-0.4% wouldn't it make more sense to have such low yields, and thus less reason for concern? Isn't it more concerning that long rates are so low now with the EFFR at a much higher level?

Appreciate your insight into what I am missing.
First, the fed funds rate (FFR) doesn't directly impact longer-term yields. Not only did we see low long-term yields in recent years when the FFR was close to 0%, but we also saw the 10y and 20y yields increasing to relatively high levels in late 2013, for example, with no change to the FFR.

If we're going to see negative yields, I'd expect to see them first in the FFR and shorter-term Treasuries. I'd expect the Fed to lower the FFR before doing any more quantitative easing (in an attempt to lower longer-term yields), and unlike in the previous years noted, when yields were low, they have a bit of room to do this before resorting to QE.

However, we are in somewhat uncharted territory with respect to the 10y and 20y yields being below the FFR after the Fed lowered the FFR a notch. Typically this type of yield curve inversion has occurred when the Fed has increased the FFR above the 10y yield, as we can see here:

Image

To some extent the yield curve inversion indicates a negative view about the longer-term path of short term rates (along with a negative term premium), so I guess it's possible that this pessimism increases fast enough and deeply enough so that the longer-term yields are driven below the FFR before the FFR drops below 0%. It seems unlikely to me, but what do I know?

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

index2max
Posts: 25
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Re: Negative Interest Rates in U.S.

Post by index2max » Tue Aug 20, 2019 6:25 pm

bgf wrote:
Sun Aug 11, 2019 11:32 am
if rates go to zero, then stocks are very cheap.
I don't know how you made the conclusion that artificially lower interest rates will lower stock prices.

Stock prices went sky-high after the 2008 crash because the near-zero interest rate policy set by the Federal Reserve meant that bonds being issued by the government were barely yielding much. Checking/Savings accounts accounts at banks and credit unions were barely paying much interest on deposits.

If you want your money to grow in this market, stocks are TINA (There Is No other Alternative). Publicly traded companies with in-demand products can set whatever prices they want to keep up with real inflation. Investors holding on shares of common stock get a piece of the action through dividends, which is why stock prices went up.

Low interest rates mean that money is "cheap". Businesses can take out loans from the bank at these artificially low interest rates as an inexpensive way to expand, buy back shares etc.

Low interest rates clearly lead to higher stock prices, not because the fundamentals of each business improved, but simply because there isn't much else competing with stocks.

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