Author Topic: Negative interest rates???  (Read 4240 times)

FrugalSaver

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Negative interest rates???
« on: April 09, 2016, 05:29:38 PM »
Ok as federal reserves and central banks around the world try to keep things going, this is the latest sleight of hand.

Can someone explain it?  If I lived in Germany and my bank changed the savings rate to -1%, why would I keep my money in the bank?  Maybe that's the exact goal - to force people into bonds or stocks in hopes of better returns.

Q1 should be the 7th quarter in a row of smaller S&P profits with this quarter looking to be down about 10%.

Whether this leads to recession or not is anyone's guess. Oil is being consumed at all time record highs even with American having the smallest number of working age people working in 40 years or so.

If you're in it for the Lon haul, it may pose some interesting opportunities as American moves on to the next administration - most likely Hillary.

Jim2001

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Re: Negative interest rates???
« Reply #1 on: April 09, 2016, 06:27:13 PM »
The negative interest rates you're reading about are what the central banks are charging (instead of paying) member banks to hold money overnight.  Take a look at Investopedia.com for the definitions of Federal Funds Rate, Prime Rate and Discount Rate.  Those are all different that the rate you would receive on a savings account or Certificate of deposit. 

Banks are held to specific capital requirements and are constantly shifting money throughout the system to meet those requirements as well as their daily business of taking one person's money and loaning it to someone else at a higher rate.

I'm not aware of any banks actually requiring individual investors to pay them to keep their money, but it is darn near zero.  The reason to keep money in the bank is that it's safer than the mattress and in the US, it's FDIC insured.  I'm not sure if other countries have an equivalent safety net.

forummm

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Re: Negative interest rates???
« Reply #2 on: April 10, 2016, 08:41:41 AM »
The goal is more to push banks with large amounts of idle cash into actually doing something with it (i.e. lending to businesses) to spur investment and get the economy moving faster.

nereo

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Re: Negative interest rates???
« Reply #3 on: April 10, 2016, 09:05:04 AM »
To add somewhat to what Jim2001 and forummm have said...
"why would I keep money in the band [with a negative interest rate]":  well - an individual might not.  But as a mind-exercise, imagine you were a large bank and you had to protect $B in assets. You could do this all in-house with a large vault and security, but that would cost you a lot of money. Paying someone else (in this case the central bank) to store and protect it for you makes economic sense, especially if you can't find better ways of earning a return on that money.

You are correct that the entire purpose of negative interest rates is to push banks to invest that money (via loans mostly) instead of sitting on it as they have been. 

Financial.Velociraptor

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Re: Negative interest rates???
« Reply #4 on: April 10, 2016, 10:01:53 AM »
The negative rates are not limited to interbank rates.  Some sovereign debt maturities in Germany and Japan are sporting negative yields.  Large institutions that are legally obligated to hold sovereign debt or similar instruments (pensions, intergovernment entities, insurance companies) have bid the prices so high they have turned red.

Jim2001

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Re: Negative interest rates???
« Reply #5 on: April 10, 2016, 05:24:56 PM »
F.V.

  Yes, some of the bonds you mention have dipped into negative rates on the open markets, but were they sold with an initial coupon rate that was really negative?  I hadn't read that.  Either way, the initial coupon rates are set at the initial auction by the market, then they float on the secondary market based on what others are willing to pay.  In neither case are those rates are set by the Fed or Central Banks, which is what the the original post was questioning.

+1 for nereo.  I hadn't thought about strictly the infrastructure costs.  Having been fortunate enough to have toured the Federal Reserve facility in Los Angeles, that's got to be a annual huge budget.

forummm

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Re: Negative interest rates???
« Reply #6 on: April 10, 2016, 06:36:12 PM »
  Yes, some of the bonds you mention have dipped into negative rates on the open markets, but were they sold with an initial coupon rate that was really negative?  I hadn't read that. 

I had read that the initial rates (whether coupon or not) were non-negative and only went negative on the secondary markets. I had read about some banks offering negative interest loans to the public though.

Jim2001

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Re: Negative interest rates???
« Reply #7 on: April 10, 2016, 07:03:58 PM »
forummm,

  I'm curious to figure out who was offering negative rates to the public and if anyone took them?


Financial.Velociraptor

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Re: Negative interest rates???
« Reply #8 on: April 10, 2016, 07:09:06 PM »
F.V.

  Yes, some of the bonds you mention have dipped into negative rates on the open markets, but were they sold with an initial coupon rate that was really negative?  I hadn't read that.  Either way, the initial coupon rates are set at the initial auction by the market, then they float on the secondary market based on what others are willing to pay.  In neither case are those rates are set by the Fed or Central Banks, which is what the the original post was questioning.

+1 for nereo.  I hadn't thought about strictly the infrastructure costs.  Having been fortunate enough to have toured the Federal Reserve facility in Los Angeles, that's got to be a annual huge budget.

That is mostly correct.  They were offered with a positive coupon but auctioned for a rate that sent the yield to maturity to a negative number.  A large number of someones are paying the German and Japanese government to protect their principal.

forummm

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Re: Negative interest rates???
« Reply #9 on: April 10, 2016, 07:11:41 PM »
forummm,

  I'm curious to figure out who was offering negative rates to the public and if anyone took them?



I feel like some of the examples were from some EU banks (like in Denmark) for mortgages and small business loans. There were at least some takers. They profiled one lady who was taking out a loan to start a business.

Oh, here's one of the articles
http://www.nytimes.com/2015/02/28/business/dealbook/in-europe-bond-yields-and-interest-rates-go-through-the-looking-glass.html

I saw another one with a guy thinking about going and buying rental property in Europe with a 0 or <0 mortgage, but the math didn't work out for him given the restrictions and hassle.

AlmstRtrd

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Re: Negative interest rates???
« Reply #10 on: April 10, 2016, 07:48:49 PM »
This site allows you to plug in a country and check out the yield curve:

http://www.six-swiss-exchange.com/services/yield_curves_en.html

Check out Switzerland. You have to go twenty years out on the curve to get into positive territory. The 30-year bond yields .157%. Just crazy.

Jim2001

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Re: Negative interest rates???
« Reply #11 on: April 10, 2016, 09:38:16 PM »
Great articles.  We'll see how this all plays out. . .

forummm

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Re: Negative interest rates???
« Reply #12 on: April 11, 2016, 08:34:03 AM »
This site allows you to plug in a country and check out the yield curve:

http://www.six-swiss-exchange.com/services/yield_curves_en.html

Check out Switzerland. You have to go twenty years out on the curve to get into positive territory. The 30-year bond yields .157%. Just crazy.

New FIRE plan: Change my name to "Switzerland" and start issuing bonds.