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The Strange World of Negative Interest Rates

Blogs > Glacierz
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Glacierz
Profile Blog Joined May 2010
United States1244 Posts
Last Edited: 2012-01-13 01:34:24
January 12 2012 22:39 GMT
#1
We have stepped into a very interesting phase of the financial market where interest rates became negative for certain parts of Europe:

Germany Sells Bills with Negative Yield

Yes that's right. People are paying the goverment to hold their money for them (eg. this means I would give the government $100 to get something like $99.99 back 6 months from now).

I find this simply mind boggling. This is an indication that people have completely lost faith in the banking sytem in Europe, and have priced in very high likelihood of bank runs. This would be the only explanation for why you would ever pay someone to hold your money.

To those who are not familiar with the US FDIC insurance policy: in the case a bank begins to default from insolvency, the FDIC insures up to $250,000 for each account (basically you are guaranteed by the government to get your money back up to this amount in case of bank failure). If you are a big corporation with 1 billion dollars in cash, there is no way to ensure all your money in the case of a financial system collapse, as that would require you to create 4000 different accounts across different FDIC insured banks, which is unrealistic. Therefore they have decided to buy Treasury bills so that you are guaranteed to get your money back from the government sometime in the future.

As fear of bank failure rises, we are starting to see government bond yield begins to head into the negative territory, so people are starting to pay the government to insure their own money.

I'm trying to find out if this has ever happened before. My guess is it has not. (I did not include the instance in the US after the collapse of Lehman in 2008 as it happened after the collapse of a major financial institution, which could technically be comparable to a bank default).

Edit: to clarify some misconceptions:

The way government bonds are traded has very little to do with inflation nowadays. Some people interpret negative rates as a sign of deflationary pressure, which is not correct. Deflation leads to 0% rate, it does not make me want to pay money to you today and get less back tomorrow.

The general fear of a collapse of the financial system in Europe has made banks unreliable at holding cash beyond the typical amount the government (FDIC in the US) would insure, so wealthy individuals and corporations are buying short term government bonds and rolling them forward at maturity (these treasury bills/notes are backed by the government instead of the banks, making them much safer). The demand for govt bonds are so high such that people are willing to pay a premium (instead of receiving one) to buy them.

ZBiR
Profile Blog Joined August 2003
Poland1092 Posts
January 12 2012 23:01 GMT
#2
On January 13 2012 07:39 Glacierz wrote:
I'm trying to find out if this has ever happened before. My guess is it has not.

No, it never happened. Totally.
Yields on three-month U.S. Treasury bills fell below zero for the first time in December 2008 after the collapse of Lehman Brothers Holdings Inc.

Did you even read what you linked?
Endymion
Profile Blog Joined November 2009
United States3701 Posts
Last Edited: 2012-01-12 23:08:16
January 12 2012 23:07 GMT
#3
this is the most misinformed post i've ever read in my life. of course it's happened before, there is always someone retarded or scared enough to buy something with a "negative interest rate," it means they don't have faith in the currency not that they don't have faith in the banks? and of course there is no way to insure a billion dollars, other wise we would never have a financial crisis like a BANK RUN in the first place..

tl;dr it's only mind boggling because you're ignorant on the subject
Have you considered the MMO-Champion forum? You are just as irrational and delusional with the right portion of nostalgic populism. By the way: The old Brood War was absolutely unplayable
Splynn
Profile Joined September 2011
United States225 Posts
January 12 2012 23:15 GMT
#4
I'm also very ignorant on the subject, though I didn't immediately go "... :O omg things are bad." Knee-jerk reactions make my head spin.

However, would anybody be willing to give a more detailed and knowledgeable account of why the OP is wrong, and what this really means for those of us who really are ignorant on the subject? I love learning <3.
serge
Profile Blog Joined June 2009
Russian Federation142 Posts
January 12 2012 23:32 GMT
#5
IDK if people have so little faith in an economy they should just bear it up and short the crap out of financial institutions or the euro or something. Or at least buy into an exchange traded fund such as this one:

http://finance.yahoo.com/echarts?s=SPY Interactive#symbol=spy;range=my;compare=;indicator=volume macd;charttype=candlestick;crosshair=on;ohlcvalues=0;logscale=off;source=;

At least if something like this goes down the drain (long term) you can expect several horsemen to follow suit.
I am Malkovich.
Endymion
Profile Blog Joined November 2009
United States3701 Posts
January 12 2012 23:39 GMT
#6
On January 13 2012 08:15 Splynn wrote:
I'm also very ignorant on the subject, though I didn't immediately go "... :O omg things are bad." Knee-jerk reactions make my head spin.

However, would anybody be willing to give a more detailed and knowledgeable account of why the OP is wrong, and what this really means for those of us who really are ignorant on the subject? I love learning <3.


it's exactly like i originally said it, there isn't any depth to it.

The government traditionally sells bonds to fund growth, or do what ever they want, that's not important. What's important is why we as investors buy the bonds. Finance has 2 main variables, rate of return and risk. is 100 dollars worth 150 in a year? What if there is a 90% chance of only getting 100 dollars back?

If people get scared, they want to have no risk. People are scared the euro will collapse, so they're willing to accept a negative rate of return on their money to keep it. They want it federally insured in the form of a bond, the rate of return is irrelevant because they're not investing the money to make money, they're buying bonds to keep their money (from their perspective).
Have you considered the MMO-Champion forum? You are just as irrational and delusional with the right portion of nostalgic populism. By the way: The old Brood War was absolutely unplayable
Myles
Profile Blog Joined March 2010
United States5162 Posts
January 12 2012 23:48 GMT
#7
Why would people do this when they could convert their money to cash? Is cash riskier then bonds? I don't know much about finance, so maybe that's why cashing out your bank account and burying the money in the backyard seems like a better idea if you're really worried about bank runs.
Moderator
EternaLLegacy
Profile Blog Joined December 2011
United States410 Posts
January 12 2012 23:52 GMT
#8
On January 13 2012 08:39 Endymion wrote:
Show nested quote +
On January 13 2012 08:15 Splynn wrote:
I'm also very ignorant on the subject, though I didn't immediately go "... :O omg things are bad." Knee-jerk reactions make my head spin.

However, would anybody be willing to give a more detailed and knowledgeable account of why the OP is wrong, and what this really means for those of us who really are ignorant on the subject? I love learning <3.


it's exactly like i originally said it, there isn't any depth to it.

The government traditionally sells bonds to fund growth, or do what ever they want, that's not important. What's important is why we as investors buy the bonds. Finance has 2 main variables, rate of return and risk. is 100 dollars worth 150 in a year? What if there is a 90% chance of only getting 100 dollars back?

If people get scared, they want to have no risk. People are scared the euro will collapse, so they're willing to accept a negative rate of return on their money to keep it. They want it federally insured in the form of a bond, the rate of return is irrelevant because they're not investing the money to make money, they're buying bonds to keep their money (from their perspective).


If people are scared of a Euro collapse, they should be buying foreign currencies and gold/silver.
Statists gonna State.
Endymion
Profile Blog Joined November 2009
United States3701 Posts
Last Edited: 2012-01-12 23:57:51
January 12 2012 23:55 GMT
#9
On January 13 2012 08:48 Myles wrote:
Why would people do this when they could convert their money to cash? Is cash riskier then bonds? I don't know much about finance, so maybe that's why cashing out your bank account and burying the money in the backyard seems like a better idea if you're really worried about bank runs.


It was something to do with the inflation rate of cash vs the interest rate - inflation rate of cash, and the risk of the increasing of inflation of the cash. The bond must payout without adherence to interest rate (i.e. if 2 euro = 4 euro in a year, the bond will pay back 200 instead of 100, both the op and the article are vague.generally you would keep bonds just to exceed the inflation rate and it would be the equivilant of putting it under your mattress.

The only reason i could see people doing this is because of deflation, but I don't think the euro is deflating atm

“There are investors out there who really worry about the return of their money. That’s why they are OK donating some of their money to Germany, just to make sure they get it back.” from the op's article, they are scared of companies/governments defaulting
Have you considered the MMO-Champion forum? You are just as irrational and delusional with the right portion of nostalgic populism. By the way: The old Brood War was absolutely unplayable
micronesia
Profile Blog Joined July 2006
United States24670 Posts
January 13 2012 00:00 GMT
#10
I believe the FDIC insures up to $250,000 rather than 25k.
ModeratorThere are animal crackers for people and there are people crackers for animals.
PC
Profile Blog Joined September 2010
United States20 Posts
January 13 2012 00:08 GMT
#11
On January 13 2012 09:00 micronesia wrote:
I believe the FDIC insures up to $250,000 rather than 25k.


This is correct. It's $250k.
Myles
Profile Blog Joined March 2010
United States5162 Posts
January 13 2012 00:11 GMT
#12
On January 13 2012 08:55 Endymion wrote:
Show nested quote +
On January 13 2012 08:48 Myles wrote:
Why would people do this when they could convert their money to cash? Is cash riskier then bonds? I don't know much about finance, so maybe that's why cashing out your bank account and burying the money in the backyard seems like a better idea if you're really worried about bank runs.


It was something to do with the inflation rate of cash vs the interest rate - inflation rate of cash, and the risk of the increasing of inflation of the cash. The bond must payout without adherence to interest rate (i.e. if 2 euro = 4 euro in a year, the bond will pay back 200 instead of 100, both the op and the article are vague.generally you would keep bonds just to exceed the inflation rate and it would be the equivilant of putting it under your mattress.

The only reason i could see people doing this is because of deflation, but I don't think the euro is deflating atm

“There are investors out there who really worry about the return of their money. That’s why they are OK donating some of their money to Germany, just to make sure they get it back.” from the op's article, they are scared of companies/governments defaulting

See, this is where my ignorance shines. I had no clue that bond payout was influenced by inflation. That makes perfect sense then. Thanks.
Moderator
serge
Profile Blog Joined June 2009
Russian Federation142 Posts
Last Edited: 2012-01-13 00:25:03
January 13 2012 00:11 GMT
#13
People who are risk averse should not be buying gold or silver.

E: also, do you mean this? http://en.wikipedia.org/wiki/Inflation-indexed_bond

Regular municipal bonds aren't indexed for inflation, and if there's a euro crash - bond holders become bag holders in the euro zone. There's also that risk of the euro being killed. That puts investors at the mercy of their government.
I am Malkovich.
danl9rm
Profile Blog Joined July 2009
United States3111 Posts
January 13 2012 00:26 GMT
#14
On January 13 2012 08:07 Endymion wrote:
this is the most misinformed post i've ever read in my life. of course it's happened before, there is always someone retarded or scared enough to buy something with a "negative interest rate," it means they don't have faith in the currency not that they don't have faith in the banks? and of course there is no way to insure a billion dollars, other wise we would never have a financial crisis like a BANK RUN in the first place..

tl;dr it's only mind boggling because you're ignorant on the subject


Wow. Why not consider him a Silver leaguer and go on your way? When Silver leaguers post in strategy I don't berate them.
"Science has so well established that the preborn baby in the womb is a living human being that most pro-choice activists have conceded the point. ..since the abortion proponents have lost the science argument, they are now advocating an existential one."
Glacierz
Profile Blog Joined May 2010
United States1244 Posts
January 13 2012 00:32 GMT
#15
On January 13 2012 09:00 micronesia wrote:
I believe the FDIC insures up to $250,000 rather than 25k.


Yes, typo corrected.
Ph4ZeD
Profile Joined September 2011
United Kingdom753 Posts
January 13 2012 00:36 GMT
#16
Has it ever happened before that people make stupid threads?
Glacierz
Profile Blog Joined May 2010
United States1244 Posts
January 13 2012 00:38 GMT
#17
On January 13 2012 08:01 ZBiR wrote:
Show nested quote +
On January 13 2012 07:39 Glacierz wrote:
I'm trying to find out if this has ever happened before. My guess is it has not.

No, it never happened. Totally.
Show nested quote +
Yields on three-month U.S. Treasury bills fell below zero for the first time in December 2008 after the collapse of Lehman Brothers Holdings Inc.

Did you even read what you linked?


I don't count Lehman because it happened AFTER the collapse of a major financial institution. The same hasn't happened in Europe and people are already panicking.
Endymion
Profile Blog Joined November 2009
United States3701 Posts
January 13 2012 00:39 GMT
#18
On January 13 2012 09:11 Myles wrote:
Show nested quote +
On January 13 2012 08:55 Endymion wrote:
On January 13 2012 08:48 Myles wrote:
Why would people do this when they could convert their money to cash? Is cash riskier then bonds? I don't know much about finance, so maybe that's why cashing out your bank account and burying the money in the backyard seems like a better idea if you're really worried about bank runs.


It was something to do with the inflation rate of cash vs the interest rate - inflation rate of cash, and the risk of the increasing of inflation of the cash. The bond must payout without adherence to interest rate (i.e. if 2 euro = 4 euro in a year, the bond will pay back 200 instead of 100, both the op and the article are vague.generally you would keep bonds just to exceed the inflation rate and it would be the equivilant of putting it under your mattress.

The only reason i could see people doing this is because of deflation, but I don't think the euro is deflating atm

“There are investors out there who really worry about the return of their money. That’s why they are OK donating some of their money to Germany, just to make sure they get it back.” from the op's article, they are scared of companies/governments defaulting

See, this is where my ignorance shines. I had no clue that bond payout was influenced by inflation. That makes perfect sense then. Thanks.


it's usually not, only in inflation-indexed bonds (i think the german bond in question is one, although the article is vague)
Have you considered the MMO-Champion forum? You are just as irrational and delusional with the right portion of nostalgic populism. By the way: The old Brood War was absolutely unplayable
Glacierz
Profile Blog Joined May 2010
United States1244 Posts
January 13 2012 00:43 GMT
#19
On January 13 2012 08:07 Endymion wrote:
this is the most misinformed post i've ever read in my life. of course it's happened before, there is always someone retarded or scared enough to buy something with a "negative interest rate," it means they don't have faith in the currency not that they don't have faith in the banks? and of course there is no way to insure a billion dollars, other wise we would never have a financial crisis like a BANK RUN in the first place..

tl;dr it's only mind boggling because you're ignorant on the subject


What? If you don't have faith in the currency, why buy the bond in the same currency only to get it back for less, also in the same currency? I don't think you understood what I'm saying.

Also FYI we have not had a bank run since you and me are alive. Financial crises has nothing to do with bank run, it is just a trigger.
JeeJee
Profile Blog Joined July 2003
Canada5652 Posts
Last Edited: 2012-01-13 00:50:00
January 13 2012 00:46 GMT
#20
This is kinda weird. I mean normally seeing inflation-linked bonds being sold at negative yields is fairly common (aren't US TIPS yields close to -1% now?)

I don't think the german bond in question is linked to inflation. And the argument of "people are scared of defaults so they give money to make sure they get it back" makes no sense because then they could just not give the money. Endymion's right in that if deflation is a concern then this is fine, so that must be the concern here..

edit: of course that's from a consumer point of view. From a company's point of view it makes sense because it's not like they can take out all the cash and put it in in a box in the basement to keep it safe or whatever. So they have to put it somewhere.. and I guess more companies are willing to accept no/negative return as a fee for storing their cash while at the same time protecting themselves against deflation
(\o/)  If you want it, you find a way. Otherwise you find excuses. No exceptions.
 /_\   aka Shinbi (requesting a name change since 27/05/09 ☺)
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