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Started By
Message
US bond yields could soon go negative. Please explain.
Posted on 6/15/16 at 12:14 pm
Posted on 6/15/16 at 12:14 pm
Story in the news. I'm trying to understand why anyone would invest knowing the return would be zero, or even getting a return less than invested. This explanation was given in the article:
LINK
As an individual, wouldn't it make more sense to keep your money in a bank that even paid zero interest? Or burying your money in the backyard? Would there be an advantage to an individual buying a US bond even if he knowing he's getting less in return than he invested?
Would US treasury investment plummet if rates goes to zero? Who is going to finance our debt with no rate of return or worse?
LINK
quote:
Negative rates are an exceptionally odd condition that is hard to wrap one's head around. What a subzero yield means in practice is that if a bond is held to maturity, one will receive less than a full dollar back for every dollar invested. Lending one's money in such conditions may sound insane, but could make sense in cases when one needs assurance of receiving a given sum of money, which is an assurance that only government bonds can provide (and even then, only if one assumes there is no chance of the government defaulting).
As an individual, wouldn't it make more sense to keep your money in a bank that even paid zero interest? Or burying your money in the backyard? Would there be an advantage to an individual buying a US bond even if he knowing he's getting less in return than he invested?
Would US treasury investment plummet if rates goes to zero? Who is going to finance our debt with no rate of return or worse?
7
Posted on 6/15/16 at 12:49 pm to Enadious
Seriously doubt they go negative but essentially that's what it's coming to to alleviate market risk.
The incentive of lower/negative rates is for economic investing. For people to go borrow cheap money and use it in the economy.
But to address your last question on who would finance it, we'll look at the rest of the world, where can you compete with that rate for that small of a risk?
The incentive of lower/negative rates is for economic investing. For people to go borrow cheap money and use it in the economy.
But to address your last question on who would finance it, we'll look at the rest of the world, where can you compete with that rate for that small of a risk?
Posted on 6/15/16 at 1:08 pm to Enadious
quote:
Would US treasury investment plummet if rates goes to zero?
Its about risk, not making a return in the conventional sense.
This post was edited on 6/15/16 at 1:09 pm
Posted on 6/15/16 at 1:10 pm to Shepherd88
More so about the cost of banks saving money. Provides incentive for banks to loan money out, thus boosting the economy, rather than saving at a negative rate.
So in practice, should translate to cheaper money for businesses and households, driving demand for loans.
History tends to show that negative interest rates do not work effectively. Because, in theory, if banks pass this cost of saving money to their customers, customers don't deposit money, thus reducing a banks reserves and ability to lend money. Or if a bank absorbs the cost of saving money itself, thus squeezing margins, it might make the bank less willing to loan money.
So in practice, should translate to cheaper money for businesses and households, driving demand for loans.
History tends to show that negative interest rates do not work effectively. Because, in theory, if banks pass this cost of saving money to their customers, customers don't deposit money, thus reducing a banks reserves and ability to lend money. Or if a bank absorbs the cost of saving money itself, thus squeezing margins, it might make the bank less willing to loan money.
Posted on 6/15/16 at 1:10 pm to Enadious
quote:You're assuming banks won't pay/charge negative interest.
As an individual, wouldn't it make more sense to keep your money in a bank that even paid zero interest?
Posted on 6/15/16 at 2:23 pm to LSURussian
banks already basically charge negative interest rates with their fees. I had to leave a bank i was banking with a couple years ago bc they wanted to charge me for depositing over $25,000/mo in cash. I run a small business, any small business, hell a subway sandwich shop would have $25,000/mo in cash. It was just ridiculous
Posted on 6/15/16 at 3:25 pm to LSURussian
quote:
You're assuming banks won't pay/charge negative interest.
So when banks start charging negative interest, where does the smart money go for an FDIC insured account?
Posted on 6/15/16 at 3:52 pm to Enadious
quote:
Would there be an advantage to an individual buying a US bond even if he knowing he's getting less in return than he invested?
People are buying Japanese bonds with negative yield
Of course they are also buying safes to stash cash in
Posted on 6/15/16 at 4:16 pm to Enadious
Banks, when they have money, can use it in two ways.
1) They can loan it out / invest it in others
2) They can deposit it at the fed window.
The fed window is as safe as you can get. Even if the amount of interest paid is very small, there is absolutely no risk. Many banks have chosen to deposit a larger amount of money at the window, instead of loaning it back out.
A negative interest rate tries to reverse that trend. If it's going to cause the bank to lose a bit of money, they may be more likely to loan it out.
1) They can loan it out / invest it in others
2) They can deposit it at the fed window.
The fed window is as safe as you can get. Even if the amount of interest paid is very small, there is absolutely no risk. Many banks have chosen to deposit a larger amount of money at the window, instead of loaning it back out.
A negative interest rate tries to reverse that trend. If it's going to cause the bank to lose a bit of money, they may be more likely to loan it out.
Posted on 6/15/16 at 7:35 pm to Enadious
There are many investors who invest in government bonds denominated in foreign currencies in order to hedge against currency risk, but ignoring the currency-hedging aspect of things, there are three big things to think about here:
#1. Why would an investor rather have a negative interest rate (NIR) bond rather than storing physical cash?
ANSWER: Because storing physical cash has a small, but non-negligible cost. Previously it was said that 0% interest rates was a lower bound, but really, it's 0% minus the cost of holding cash.
#2. Given that most cash is not physical cash, but is stored electronically, why does that have any cost associated with it?
ANSWER: Because storing large sums of cash at private banks subjects the investor to credit default risk, from the non-zero probability that the bank will default on its obligations to depositors. That risk is itself a cost of holding cash, and it applies to electronic as well as physical cash. Sovereign bonds for countries such as the U.S. are lower risk than private banks.
#3. Given that even modest interest rates would likely outweigh the credit risk of storing cash at a large private bank, why would such banks ever charge negative interest rates to customers?
ANSWER: Because at 0% interest rates, these banks might already have too much capital. Even for a private bank storing its own cash electronically, there is still a cost, because it has to pay the central bank to store its electronic cash, and the central bank charges NIR for public policy reasons.
Of course, a private bank could request physical cash in exchange for its electronic deposits, but as this article from The Economist explains:
Thus the transaction costs associated with storing and protecting physical cash can cause NIR, but there is still a there is a lower bound for interest rates that will not allow rates to go very much below zero. It's not as if policymakers have the power to push NIR arbitrarily to distances below 0%.
#1. Why would an investor rather have a negative interest rate (NIR) bond rather than storing physical cash?
ANSWER: Because storing physical cash has a small, but non-negligible cost. Previously it was said that 0% interest rates was a lower bound, but really, it's 0% minus the cost of holding cash.
#2. Given that most cash is not physical cash, but is stored electronically, why does that have any cost associated with it?
ANSWER: Because storing large sums of cash at private banks subjects the investor to credit default risk, from the non-zero probability that the bank will default on its obligations to depositors. That risk is itself a cost of holding cash, and it applies to electronic as well as physical cash. Sovereign bonds for countries such as the U.S. are lower risk than private banks.
#3. Given that even modest interest rates would likely outweigh the credit risk of storing cash at a large private bank, why would such banks ever charge negative interest rates to customers?
ANSWER: Because at 0% interest rates, these banks might already have too much capital. Even for a private bank storing its own cash electronically, there is still a cost, because it has to pay the central bank to store its electronic cash, and the central bank charges NIR for public policy reasons.
Of course, a private bank could request physical cash in exchange for its electronic deposits, but as this article from The Economist explains:
quote:
This has not caused commercial banks to swap their reserves at the central bank for cash, as theory would suggest. That is because to do so would itself be costly. To settle payments, banks must move vast sums between themselves each day. The costs of counting, storing, moving and insuring lorry-loads of banknotes apparently trumps the smallish charge Europe’s central banks are levying to hold electronic deposits. The other possible use for banks’ reserves is to lend them to other banks, but they are already awash with the excess liquidity created by QE.
The deposit rate at central banks sets a floor for the cost of overnight loans more generally, which is why short-term money-market rates have also turned negative. Indeed, negative policy rates and money creation through central-bank purchases of bonds or foreign currencies have dragged the yields on sovereign bonds into the red all over Europe (see chart). That in turn has pulled down the interest rates charged by banks for new loans.
Banks have passed on some of the cost of negative rates to their corporate clients. For them, too, the cost of moving and storing large stocks of cash is prohibitive; the obvious alternative—buying safe and liquid bonds—also now comes at a cost, thanks to negative yields.
Thus the transaction costs associated with storing and protecting physical cash can cause NIR, but there is still a there is a lower bound for interest rates that will not allow rates to go very much below zero. It's not as if policymakers have the power to push NIR arbitrarily to distances below 0%.
Posted on 6/15/16 at 8:25 pm to Doc Fenton
quote:
Doc Fenton
I came here to post something similar but you explained it quite well.
Posted on 6/15/16 at 8:34 pm to Enadious
quote:
So when banks start charging negative interest, where does the smart money go for an FDIC insured account?
If you don't need liquidity, MLCD's(Market-linked CD's).
Posted on 8/13/16 at 4:05 pm to Enadious
quote:
So when banks start charging negative interest
A branch of Raiffeisen in Bavaria has now started doing that for private, non-commercial depositors. From Barron's blog: " German Bank Imposes Negative Rates on Individual Depositors"
quote:
A new line has been crossed in the global move to negative interest rate policy. Before banks only imposed negative rates on businesses and each other. Now a German bank is charging individual depositors with large balances a negative rate.
Posted on 8/14/16 at 7:54 am to Enadious
Banks don't have to take deposits. Small, super safe banks were actually turning deposits away during the 2009 meltdown.
Posted on 8/14/16 at 9:05 am to TheHiddenFlask
quote:
Banks don't have to take deposits. Small, super safe banks
Banks that want to be big do.
Posted on 8/14/16 at 9:14 am to foshizzle
Banks that want to be big aren't risk free.
Deposits are not cheap to hold.
Deposits are not cheap to hold.
Posted on 8/14/16 at 10:26 am to Shepherd88
quote:
The incentive of lower/negative rates is for economic investing. For people to go borrow cheap money and use it in the stock market.
FIFY
It's part of the reason we currently have an asset bubble.
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