Canada sells Negative-yield bonds?!?!?

[swick]

Can those who are smarter than me educate me as to why ANYONE would think this is a good idea? What am I missing?

Does the bleak look for the stock market right now really matter to those stashing away for retirement?

I'm feeling out of my league in understanding this new "savings" vehicle - and seriously battling the niggling voice of my father who thinks economic collapse is evident. The rational numbers understanding side of my brain says there is nothing to worry about...but... the fact that something like this even exists has me a little weary?

http://www.cbc.ca/news/business/cibc-negative-yield-bonds-1.3685259

[LAGuy]

Lot of places selling negative yield bonds. Imagine this: you're a government. It dawns on you that people will PAY for the privilege to lend you money. Being government, you realize that you've never met a revenue source you didn't like.

Now, understanding that, how do figure low rates are going away anytime soon? I wouldn't worry about it and not change your overall investing strategy (except to maybe reduce your bond allocation, lol).

[daverobev]

The thing that gets me is that this is a *bank*, not a government. The bonds are "double protected" in that they are backed first by CIBC, and in the case CIBC goes bankrupt, the mortgages that the bonds are lent against.

Thing is, money at the bank is only protected up to any government level, for individuals. If you're a corporation and your bank goes under when you have deposits you are, AFAIK, fucked.

So, what does Apple (say) do with its enormous cash pile?

There is also the second thing to consider: bond return is a combination of two things, the 'coupon' (which is negative), and any gain or loss to inflation. Of course, normally there *is* inflation, so your bond has to yield more than inflation else you get a negative return assuming you hold to maturity. If there is deflation, owning something that will be worth $100 in 30 years could be good - if $100 in 30 years is worth $1000 today!

Who knows. We're absolutely in uncharted territory. Stocks are high, bonds are high, real estate is high, gold is high, cash is cheap (and, so, why would you NOT put it into assets...).

People will continue to buy toilet paper. I'm seriously considering adding an allocation to consumer staples, separate from everything else. I already have a little money in utilities.

The thing with the 4% rule is, it's valid in modern history. Go back 200 years and the idea just doesn't exist - most people work on the land or in nasty factories.

Interesting times. I do know that the good old government is going to give us a lot more money than the last did for our sproglings - enough to finance a new car over a 7 year term, even! Lordy.

[csdreaming]

If you have $200 million in emergency cash where can you put it that you can easily redeem it? Why do you need to redeem it? One of your businesses needs a cash infusion, a cushion against legal settlements, a corrupt government seizes one of your factories and you need to build a new one in another country. Bank accounts have a lifetime protection of 250k and SIPC is 500k. Many banks will charge you a percentage (like negative interest bonds) if you park several million in one account. Stocks can go down when you really need it and many actively managed funds may not let you withdraw it suddenly. Bonds by large governments are a very liquid way to park large amounts of cash (that go up when the market gets worse).

There are capacity issues when you get to large amounts of cash.

Edit: If you really believe economic collapse is evident (and I certainly don't) you should buy a farm, tools, and a few guns.

[LAGuy]

Many times bonds have returned less than inflation. I don't think current times are really that particularly different than any others even though interest rates are low.

The thing that I think makes it seem strange to people, is that bonds have been a really good investment over the past 20 to 30 years. Historically, that's not really been the case, however. Bonds were more of a capital preservation mechanic than they were something that really made people money. What you're seeing is bonds are returning to that historical role.

[marty998]

Many times bonds have returned less than inflation. I don't think current times are really that particularly different than any others even though interest rates are low.

The thing that I think makes it seem strange to people, is that bonds have been a really good investment over the past 20 to 30 years. Historically, that's not really been the case, however. Bonds were more of a capital preservation mechanic than they were something that really made people money. What you're seeing is bonds are returning to that historical role.

Except in historical times the yield wasn't negative.

Deflation is a sure fire way to crash an economy. Some level of inflation (1-3%) is a good thing to have. Money needs to be priced properly as well... zero to negative rates will have catastrophic consequences IMHO... leads to too much speculating into too few investment grade assets.

[LAGuy]

Inflation is running just under 2%. And I don't think it speculation to buy stocks that are currently yielding more than bonds. That's just rational investing.

If bond yields are currently "too low" what then is normal? And why?

[retiringearly]

A growing portion of the debt of developed economies have negative yields now (Switzerland, Germany, Japan, et al).  I don't think the US Fed can raise rates while the rest of the developed world cuts them (and even goes negative). 

A few of the financial newsletters that I follow have been pounding the table for gold and gold stocks since the beginning of the year.  The theory is that gold will be a better safe haven of value than government bonds.  I bought back DGP, GDX & GDXJ in March, doing well so far.

[tooqk4u22]

Inflation is running just under 2%. And I don't think it speculation to buy stocks that are currently yielding more than bonds. That's just rational investing.

If bond yields are currently "too low" what then is normal? And why?

The historical average is for the 10year US Treasury to yield about 2% above inflation.....so normalized interest rates should be around 3.5-4% right now thus bond yields are too low in the US which then carries over to all other asset classes. But like other markets, while the spread over inflation averages about 2% the swings at any time have been much higher or lower spreads over inflation.


AS for the OP, its not Canada selling negative rate bonds it is CIBC selling them in Euro denominated.  And the bonds are highly attractive to buyers that desire to preserve capital and are willing to essentially pay a holding fee that they otherwise couldn't do in cash at a bank, especially in light of those Eurozone banks/governments potentially increasing charges for deposits (ie negative rates)

[LAGuy]

A growing portion of the debt of developed economies have negative yields now (Switzerland, Germany, Japan, et al).  I don't think the US Fed can raise rates while the rest of the developed world cuts them (and even goes negative). 

A few of the financial newsletters that I follow have been pounding the table for gold and gold stocks since the beginning of the year.  The theory is that gold will be a better safe haven of value than government bonds.  I bought back DGP, GDX & GDXJ in March, doing well so far.

Somebody, somewhere, is always pounding the table for gold.

[swick]

AS for the OP, its not Canada selling negative rate bonds it is CIBC selling them in Euro denominated.  And the bonds are highly attractive to buyers that desire to preserve capital and are willing to essentially pay a holding fee that they otherwise couldn't do in cash at a bank, especially in light of those Eurozone banks/governments potentially increasing charges for deposits (ie negative rates)

That was why I was confused! I didn't know banks could offer bonds until now. But I'm still learning all this stuff.

This is a super interesting discussion, thanks to everyone who is participating!

[seattlecyclone]

I see from the article that these are Euro-denominated bonds. As such they compete against other Euro-denominated debt, such as government debt that has already been sold at negative interest rates.

If you think the Euro will gain ground against the dollar, these bonds could well return more than dollar-denominated debt with positive interest rates.

[Jack]

A growing portion of the debt of developed economies have negative yields now (Switzerland, Germany, Japan, et al).  I don't think the US Fed can raise rates while the rest of the developed world cuts them (and even goes negative). 

A few of the financial newsletters that I follow have been pounding the table for gold and gold stocks since the beginning of the year.  The theory is that gold will be a better safe haven of value than government bonds.  I bought back DGP, GDX & GDXJ in March, doing well so far.

It sounds to me like this situation might lead to some more quantitative easing.

[MustacheExplorer]

I understand that in Japan negative interest rate were to encourage spending.  Spending on home safes has skyrocketed.