Author Topic: Bonds-how can they go negative?  (Read 3746 times)

RosieTR

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Bonds-how can they go negative?
« on: October 09, 2015, 08:43:41 PM »
Recently came across this report http://www.ft.com/cms/s/0/0ce82b30-9d5e-11e4-8946-00144feabdc0.html#axzz3o81eeW8Y about how the Swiss government was able to issue negative yield bonds. Huh? I could gather that maybe it was a currency thing? But then similar situation for eurozone countries, so how does that work? US bonds are pretty crappy yields (2% or so on the 10 year) but nothing like less than zero. How does that even work? You pay 11,000 francs and get 10,000 back in 10 years with no interest? Are people crazy? How can they not just have the $ in a savings account or something, yielding nothing but waiting for bonds to yield...something?

Any thoughts on this? And, if it needs to move to a different section that's great. It's mostly a general question about how an investment works, not specific advice, so I wasn't certain where it should go.

Kriegsspiel

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Re: Bonds-how can they go negative?
« Reply #1 on: October 09, 2015, 08:47:51 PM »
Deflation.

NorCal

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Re: Bonds-how can they go negative?
« Reply #2 on: October 09, 2015, 08:55:08 PM »
I couldn't get through the paywall, but my guess is that it's able to happen in a few limited circumstances due to forced institutional buyers.  I wouldn't expect this to be a broad phenomenon.

As an example, banks and insurance companies are required by regulation to hold a certain amount of high-quality collateral.  This typically means government issued AAA rated bonds.  There is an inherently limited supply of these bonds, and numerous institutions that MUST buy it (per law).

JohnPaul

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Re: Bonds-how can they go negative?
« Reply #3 on: October 10, 2015, 03:44:20 AM »
Keep the $ X from time T1 to be issued in the future at the time T2 and the service can provide a premium but it can nonetheless come up with cost. It is determined by the outcome of the forecast.

sirdoug007

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Re: Bonds-how can they go negative?
« Reply #4 on: October 10, 2015, 09:24:31 AM »
The treasury just auctioned 3 month bonds at 0%. The U.S. has so far refused to sell bonds below 0%.

http://www.wsj.com/articles/u-s-treasury-bonds-pull-back-1444052528

Negative bonds work just like you said. You pay $100 and after the term they give you back a bit less than $100.




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Zinsch

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Re: Bonds-how can they go negative?
« Reply #5 on: October 10, 2015, 07:16:19 PM »
Money in a savings account isn't risk free. You are giving the bank your money and hoping that the bank doesn't go bankrupt.

Mighty-Dollar

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Re: Bonds-how can they go negative?
« Reply #6 on: October 10, 2015, 07:57:30 PM »
The whole "bond bubble" is waaaay over blown. The total bond market index has an average duration of 5.6 years.  So if interest rates went up 1% in 1 year that's about a 5 - 6% loss. But you add the 2.35% annual interest rate then you're down to a 2.65% - 3.65% loss. I'm not even gonna do the math on how much a 1/4% rate increase would "eat into" your bond fund. Peanuts.

Clean Shaven

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Re: Bonds-how can they go negative?
« Reply #7 on: October 11, 2015, 07:35:18 AM »
Money in a savings account isn't risk free. You are giving the bank your money and hoping that the bank doesn't go bankrupt.
US banks are required to insure deposits up to $250k per depositor per bank. Google FDIC. 

YoungInvestor

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Re: Bonds-how can they go negative?
« Reply #8 on: October 11, 2015, 07:47:24 AM »
Money in a savings account isn't risk free. You are giving the bank your money and hoping that the bank doesn't go bankrupt.
US banks are required to insure deposits up to $250k per depositor per bank. Google FDIC.

The entities buying government debt at negative interest rates generally have quite a bit more than 250k to store.

Clean Shaven

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Re: Bonds-how can they go negative?
« Reply #9 on: October 11, 2015, 08:02:21 AM »
Money in a savings account isn't risk free. You are giving the bank your money and hoping that the bank doesn't go bankrupt.
US banks are required to insure deposits up to $250k per depositor per bank. Google FDIC.

The entities buying government debt at negative interest rates generally have quite a bit more than 250k to store.
True. But those aren't consumer savings accounts, which I interpreted this post as referencing.

k9

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Re: Bonds-how can they go negative?
« Reply #10 on: October 11, 2015, 08:03:04 AM »
The thing is, when you are a big, institutional investor (not Joe the average mustachian investing $1000 a month), you need a place to park your cash. A safe place, for a lot of cash. When inflation is not a threat and banks are getting unsafe (you can probably find the list of all banks that failed in the US for the last 5 or 10 years, that's quite frightening, and remember there's no FDIC for institutional investors trying to park $10M of cash), the only safe bet is a country's sovereign debt.

So, when you need to keep your cash, the guarantee to recover 99.9% of your cash is much better than risking (although at a small risk) your cash for a potential 1% yield. Because, if you lose your cash, you go bankrupt too. And losing 0.01% is much better than going bankrupt. Anyway, in many countries, there are laws forcing some institutional investors (insurance companies, pension funds, etc.) to park a given percentage of their money on very safe places.

But I'm not sure lots of individual investors buy those bonds, except maybe a few diehard local PP investors.

nobodyspecial

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Re: Bonds-how can they go negative?
« Reply #11 on: October 11, 2015, 09:34:07 AM »
Money in a savings account isn't risk free. You are giving the bank your money and hoping that the bank doesn't go bankrupt.
US banks are required to insure deposits up to $250k per depositor per bank. Google FDIC.
If you are Apple, where do you put $150Bn to keep it safe?

I really want to believe they have a Scrooge McDuck pile of gold coins that senior Apple execs swim in

seattlecyclone

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Re: Bonds-how can they go negative?
« Reply #12 on: October 11, 2015, 09:42:33 AM »
A natural question might be "well, why don't they just get a bunch of physical cash and store it in a vault somewhere?" For this to work, you have to buy a vault and pay a security guard. As long as that cost is larger than the cost of the negative interest on a bond, such a bond can make sense.