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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.
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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?
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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
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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.
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Russian Federation142 Posts
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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).
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United States5162 Posts
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.
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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.
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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
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United States24700 Posts
I believe the FDIC insures up to $250,000 rather than 25k.
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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.
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United States5162 Posts
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.
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Russian Federation142 Posts
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.
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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.
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On January 13 2012 09:00 micronesia wrote:
I believe the FDIC insures up to $250,000 rather than 25k.
Yes, typo corrected.
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Has it ever happened before that people make stupid threads?
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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.
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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)
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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.
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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
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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.
To answer your question, a typical investor whose total networth is less than $250,000 will never buy the bonds with negative rates. They simply let the money sit in a bank account with positive interests.
The buyers are not you or me, they are large corporations with a lot of cash on their balance sheet and do not trust a single bank to hold it since not all of it is insured. Who is more trustworthy than banks? Only the government. Therefore in order to protect their money from a systemic collapse, they are willing to pay the government to store their money for them at a cost.
People who think this is common are morons. Negative rates are extremely rare and are usually indications of very bad economic outlooks. This case is particularly interesting as no bank failures has yet to happen before rates became negative.
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On January 13 2012 09:46 JeeJee wrote:
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.
![[image loading]](http://www.x-rates.com/d/EUR/USD/graph120.png)
Euro to USD
apparently the euro has been traditionally deflating over 2011, so this would make sense. If the euro's deflation rate exceeds the bond's interest rate, then it's a sound move, just as if the euro's deflation rate was less than the bond's interest rate.
On January 13 2012 09:49 Glacierz 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. To answer your question, a typical investor whose total networth is less than $250,000 will never buy the bonds with negative rates. They simply let the money sit in a bank account with positive interests. The buyers are not you or me, they are large corporations with a lot of cash on their balance sheet and do not trust a single bank to hold it since not all of it is insured. Who is more trustworthy than banks? Only the government. Therefore in order to protect their money from a systemic collapse, they are willing to pay the government to store their money for them at a cost. People who think this is common are morons. Negative rates are extremely rare and are usually indications of very bad economic outlooks. This case is particularly interesting as no bank failures has yet to happen before rates became negative.
It's common in a period of currency deflation, it has little to do with the economy. Look at zimbabwe, with their rate of hyperinflation i'm sure you can find bonds with rates of return exceeding 500%, it doesn't mean anything of course..
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Endymion has the basic concepts down, but we're not going to see any deflation in Europe. Bund yields, and all other EMU bond yields are being affected by things like competitive advantage (read risk premia again other European sovereign debt), worldwide "risk-off" sentiment and collateralization. This last one is huge because Euro banks need safe/liquid assets that can earn carry via the ECB.
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On January 13 2012 09:52 Endymion wrote:Show nested quote +On January 13 2012 09:46 JeeJee wrote:
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. Euro to USD apparently the euro has been traditionally deflating over 2011, so this would make sense. If the euro's deflation rate exceeds the bond's interest rate, then it's a sound move, just as if the euro's deflation rate was less than the bond's interest rate.
nah deflation concerns are beside the issue. glacierz has it right; I forgot the buyers in question are big companies not you and me. They have to put the cash somewhere (no mattress big enough to store billions  ) and if you don't trust the banks, where are you going to go? Enough companies must be scared enough to pay the gov't to hold their cash for them
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On January 13 2012 09:46 JeeJee wrote:
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
You are right, TIPS's payout is variable, if you have high inflation expectations, you will typically see negative yield as the principal is adjusted for inflation at maturity, returning you enough money to offset inflation.
From a company's perspective, not giving the money to the govt. means a majority of it is not insured in the case of bank failure.
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On January 13 2012 09:54 JeeJee wrote:Show nested quote +On January 13 2012 09:52 Endymion wrote:On January 13 2012 09:46 JeeJee wrote:
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. Euro to USD apparently the euro has been traditionally deflating over 2011, so this would make sense. If the euro's deflation rate exceeds the bond's interest rate, then it's a sound move, just as if the euro's deflation rate was less than the bond's interest rate. nah deflation concerns are beside the issue. glacierz has it right; I forgot the buyers in question are big companies not you and me. They have to put the cash somewhere (no mattress big enough to store billions ) and if you don't trust the banks, where are you going to go? Enough companies must be scared enough to pay the gov't to hold their cash for them
why not just invest their money into assets or ownership in other companies then though, which would have a much larger margin of return..
it must have to do with risk, but i find it strange that EU corporations would be so scared of both domestic and international stability that they would turn to governments, seeing as the US economy is in a substantial upswing at the moment. I'm a US student so I really admittedly don't have much knowledge of the EU economy in terms of speculation other than basic theory.
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On January 13 2012 09:56 Endymion wrote:Show nested quote +On January 13 2012 09:54 JeeJee wrote:On January 13 2012 09:52 Endymion wrote:On January 13 2012 09:46 JeeJee wrote:
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. Euro to USD apparently the euro has been traditionally deflating over 2011, so this would make sense. If the euro's deflation rate exceeds the bond's interest rate, then it's a sound move, just as if the euro's deflation rate was less than the bond's interest rate. nah deflation concerns are beside the issue. glacierz has it right; I forgot the buyers in question are big companies not you and me. They have to put the cash somewhere (no mattress big enough to store billions ) and if you don't trust the banks, where are you going to go? Enough companies must be scared enough to pay the gov't to hold their cash for them why not just invest their money into assets or ownership in other companies then though, which would have a much larger margin of return..
risk
this is the ultimate flight to safety response
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Deflation does not lead to negative rates, it leads to zero rates. Huge difference there.
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On January 13 2012 09:52 Endymion wrote:Show nested quote +On January 13 2012 09:46 JeeJee wrote:
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. Euro to USD apparently the euro has been traditionally deflating over 2011, so this would make sense. If the euro's deflation rate exceeds the bond's interest rate, then it's a sound move, just as if the euro's deflation rate was less than the bond's interest rate. Show nested quote +On January 13 2012 09:49 Glacierz 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. To answer your question, a typical investor whose total networth is less than $250,000 will never buy the bonds with negative rates. They simply let the money sit in a bank account with positive interests. The buyers are not you or me, they are large corporations with a lot of cash on their balance sheet and do not trust a single bank to hold it since not all of it is insured. Who is more trustworthy than banks? Only the government. Therefore in order to protect their money from a systemic collapse, they are willing to pay the government to store their money for them at a cost. People who think this is common are morons. Negative rates are extremely rare and are usually indications of very bad economic outlooks. This case is particularly interesting as no bank failures has yet to happen before rates became negative. It's common in a period of currency deflation, it has little to do with the economy. Look at zimbabwe, with their rate of hyperinflation i'm sure you can find bonds with rates of return exceeding 500%, it doesn't mean anything of course..
Your graph confuses FX spot with inflation/deflation. They are not equal
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On January 13 2012 10:00 bellweather wrote:Show nested quote +On January 13 2012 09:52 Endymion wrote:On January 13 2012 09:46 JeeJee wrote:
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. Euro to USD apparently the euro has been traditionally deflating over 2011, so this would make sense. If the euro's deflation rate exceeds the bond's interest rate, then it's a sound move, just as if the euro's deflation rate was less than the bond's interest rate. On January 13 2012 09:49 Glacierz 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. To answer your question, a typical investor whose total networth is less than $250,000 will never buy the bonds with negative rates. They simply let the money sit in a bank account with positive interests. The buyers are not you or me, they are large corporations with a lot of cash on their balance sheet and do not trust a single bank to hold it since not all of it is insured. Who is more trustworthy than banks? Only the government. Therefore in order to protect their money from a systemic collapse, they are willing to pay the government to store their money for them at a cost. People who think this is common are morons. Negative rates are extremely rare and are usually indications of very bad economic outlooks. This case is particularly interesting as no bank failures has yet to happen before rates became negative. It's common in a period of currency deflation, it has little to do with the economy. Look at zimbabwe, with their rate of hyperinflation i'm sure you can find bonds with rates of return exceeding 500%, it doesn't mean anything of course.. Your graph confuses FX spot with inflation/deflation. They are not equal
true, but the worth of the euro has historically deflated over the course of 2011 in regards to the USD which could prompt fear of a crash.
On January 13 2012 09:58 Glacierz wrote:
Deflation does not lead to negative rates, it leads to zero rates. Huge difference there.
I don't understand why it would make a huge difference, if the rate of deflation was enough you could still make/retain money (in terms of its future worth) with investing into a negative rate bond.
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On January 13 2012 09:56 Endymion wrote:Show nested quote +On January 13 2012 09:54 JeeJee wrote:On January 13 2012 09:52 Endymion wrote:On January 13 2012 09:46 JeeJee wrote:
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. Euro to USD apparently the euro has been traditionally deflating over 2011, so this would make sense. If the euro's deflation rate exceeds the bond's interest rate, then it's a sound move, just as if the euro's deflation rate was less than the bond's interest rate. nah deflation concerns are beside the issue. glacierz has it right; I forgot the buyers in question are big companies not you and me. They have to put the cash somewhere (no mattress big enough to store billions ) and if you don't trust the banks, where are you going to go? Enough companies must be scared enough to pay the gov't to hold their cash for them why not just invest their money into assets or ownership in other companies then though, which would have a much larger margin of return.. it must have to do with risk, but i find it strange that EU corporations would be so scared of both domestic and international stability that they would turn to governments, seeing as the US economy is in a substantial upswing at the moment. I'm a US student so I really admittedly don't have much knowledge of the EU economy in terms of speculation other than basic theory.
Let's say I need this money 6 months from now to buy new equipment for the firm. How do I make sure I will have exactly this much in 6 months, but nothing less?
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On January 13 2012 10:04 Endymion wrote:Show nested quote +On January 13 2012 10:00 bellweather wrote:On January 13 2012 09:52 Endymion wrote:On January 13 2012 09:46 JeeJee wrote:
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. Euro to USD apparently the euro has been traditionally deflating over 2011, so this would make sense. If the euro's deflation rate exceeds the bond's interest rate, then it's a sound move, just as if the euro's deflation rate was less than the bond's interest rate. On January 13 2012 09:49 Glacierz 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. To answer your question, a typical investor whose total networth is less than $250,000 will never buy the bonds with negative rates. They simply let the money sit in a bank account with positive interests. The buyers are not you or me, they are large corporations with a lot of cash on their balance sheet and do not trust a single bank to hold it since not all of it is insured. Who is more trustworthy than banks? Only the government. Therefore in order to protect their money from a systemic collapse, they are willing to pay the government to store their money for them at a cost. People who think this is common are morons. Negative rates are extremely rare and are usually indications of very bad economic outlooks. This case is particularly interesting as no bank failures has yet to happen before rates became negative. It's common in a period of currency deflation, it has little to do with the economy. Look at zimbabwe, with their rate of hyperinflation i'm sure you can find bonds with rates of return exceeding 500%, it doesn't mean anything of course.. Your graph confuses FX spot with inflation/deflation. They are not equal true, but the worth of the euro has historically deflated over the course of 2011 in regards to the USD which could prompt fear of a crash.
That would be more meaningful to the inflation/deflation argument if the US was a much larger trading partner for Germany and if USTs weren't crack cocaine to the investment community right now.
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On January 13 2012 10:05 Glacierz wrote:Show nested quote +On January 13 2012 09:56 Endymion wrote:On January 13 2012 09:54 JeeJee wrote:On January 13 2012 09:52 Endymion wrote:On January 13 2012 09:46 JeeJee wrote:
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. Euro to USD apparently the euro has been traditionally deflating over 2011, so this would make sense. If the euro's deflation rate exceeds the bond's interest rate, then it's a sound move, just as if the euro's deflation rate was less than the bond's interest rate. nah deflation concerns are beside the issue. glacierz has it right; I forgot the buyers in question are big companies not you and me. They have to put the cash somewhere (no mattress big enough to store billions ) and if you don't trust the banks, where are you going to go? Enough companies must be scared enough to pay the gov't to hold their cash for them why not just invest their money into assets or ownership in other companies then though, which would have a much larger margin of return.. it must have to do with risk, but i find it strange that EU corporations would be so scared of both domestic and international stability that they would turn to governments, seeing as the US economy is in a substantial upswing at the moment. I'm a US student so I really admittedly don't have much knowledge of the EU economy in terms of speculation other than basic theory. Let's say I need this money 6 months from now to buy new equipment for the firm. How do I make sure I will have exactly this much in 6 months, but nothing less?
the same way that any corporation would do it, probably calculating predicted book cash flows six months into the future, and then planning to sell shares/expand less in the period of 6 months to make sure you had the money to buy it.
(how would a company predict product costs of the future? you just make a general prediction then adjust net income at the end of the period)
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On January 13 2012 10:08 Endymion wrote:Show nested quote +On January 13 2012 10:05 Glacierz wrote:On January 13 2012 09:56 Endymion wrote:On January 13 2012 09:54 JeeJee wrote:On January 13 2012 09:52 Endymion wrote:On January 13 2012 09:46 JeeJee wrote:
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. Euro to USD apparently the euro has been traditionally deflating over 2011, so this would make sense. If the euro's deflation rate exceeds the bond's interest rate, then it's a sound move, just as if the euro's deflation rate was less than the bond's interest rate. nah deflation concerns are beside the issue. glacierz has it right; I forgot the buyers in question are big companies not you and me. They have to put the cash somewhere (no mattress big enough to store billions ) and if you don't trust the banks, where are you going to go? Enough companies must be scared enough to pay the gov't to hold their cash for them why not just invest their money into assets or ownership in other companies then though, which would have a much larger margin of return.. it must have to do with risk, but i find it strange that EU corporations would be so scared of both domestic and international stability that they would turn to governments, seeing as the US economy is in a substantial upswing at the moment. I'm a US student so I really admittedly don't have much knowledge of the EU economy in terms of speculation other than basic theory. Let's say I need this money 6 months from now to buy new equipment for the firm. How do I make sure I will have exactly this much in 6 months, but nothing less? the same way that any corporation would do it, probably calculating predicted book cash flows six months into the future, and then planning to sell shares/expand less in the period of 6 months to make sure you had the money to buy it.
By your logic, it wouldn't make sense for corporate to own cash at all on their balance sheet, as everything can be predicted perfectly with your cash flow model. Why do you think so many corporations in the US are sitting on a ton of cash ever since the crash of 2008? Pls don't tell me they are all irrational because these firms hire very smart consultants to do their finances.
You own cash / cash equavalent on your balance sheet because of the uncertainty of cash flows. One bad quarter with negative cashflow will create illiquidity for the firm. Short duration govt. bonds are considered cash equavalents, it helps maintain liquidity and avoid debt default. Anyone with basic understanding of finance would be able to rationalize this.
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On January 13 2012 10:12 Glacierz wrote:Show nested quote +On January 13 2012 10:08 Endymion wrote:On January 13 2012 10:05 Glacierz wrote:On January 13 2012 09:56 Endymion wrote:On January 13 2012 09:54 JeeJee wrote:On January 13 2012 09:52 Endymion wrote:On January 13 2012 09:46 JeeJee wrote:
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. Euro to USD apparently the euro has been traditionally deflating over 2011, so this would make sense. If the euro's deflation rate exceeds the bond's interest rate, then it's a sound move, just as if the euro's deflation rate was less than the bond's interest rate. nah deflation concerns are beside the issue. glacierz has it right; I forgot the buyers in question are big companies not you and me. They have to put the cash somewhere (no mattress big enough to store billions ) and if you don't trust the banks, where are you going to go? Enough companies must be scared enough to pay the gov't to hold their cash for them why not just invest their money into assets or ownership in other companies then though, which would have a much larger margin of return.. it must have to do with risk, but i find it strange that EU corporations would be so scared of both domestic and international stability that they would turn to governments, seeing as the US economy is in a substantial upswing at the moment. I'm a US student so I really admittedly don't have much knowledge of the EU economy in terms of speculation other than basic theory. Let's say I need this money 6 months from now to buy new equipment for the firm. How do I make sure I will have exactly this much in 6 months, but nothing less? the same way that any corporation would do it, probably calculating predicted book cash flows six months into the future, and then planning to sell shares/expand less in the period of 6 months to make sure you had the money to buy it. By your logic, it wouldn't make sense for corporate to own cash at all on their balance sheet, as everything can be predicted perfectly with your cash flow model. Why do you think so many corporations in the US are sitting on a ton of cash ever since the crash of 2008? Pls don't tell me they are all irrational because these firms hire very smart consultants to do their finances.
by accounting logic, it doesn't make sense. the only reason you would want to hold onto cash is because you're uncertain about the future, and you're trying to cushion yourself for mistakes. I don't know enough to stand in the shoes of the financial consultants on wall street, but to me it reaks of uncertainty and being "soft-footed" (unwilling to take risks)
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On January 13 2012 10:15 Endymion wrote:Show nested quote +On January 13 2012 10:12 Glacierz wrote:On January 13 2012 10:08 Endymion wrote:On January 13 2012 10:05 Glacierz wrote:On January 13 2012 09:56 Endymion wrote:On January 13 2012 09:54 JeeJee wrote:On January 13 2012 09:52 Endymion wrote:On January 13 2012 09:46 JeeJee wrote:
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. Euro to USD apparently the euro has been traditionally deflating over 2011, so this would make sense. If the euro's deflation rate exceeds the bond's interest rate, then it's a sound move, just as if the euro's deflation rate was less than the bond's interest rate. nah deflation concerns are beside the issue. glacierz has it right; I forgot the buyers in question are big companies not you and me. They have to put the cash somewhere (no mattress big enough to store billions ) and if you don't trust the banks, where are you going to go? Enough companies must be scared enough to pay the gov't to hold their cash for them why not just invest their money into assets or ownership in other companies then though, which would have a much larger margin of return.. it must have to do with risk, but i find it strange that EU corporations would be so scared of both domestic and international stability that they would turn to governments, seeing as the US economy is in a substantial upswing at the moment. I'm a US student so I really admittedly don't have much knowledge of the EU economy in terms of speculation other than basic theory. Let's say I need this money 6 months from now to buy new equipment for the firm. How do I make sure I will have exactly this much in 6 months, but nothing less? the same way that any corporation would do it, probably calculating predicted book cash flows six months into the future, and then planning to sell shares/expand less in the period of 6 months to make sure you had the money to buy it. By your logic, it wouldn't make sense for corporate to own cash at all on their balance sheet, as everything can be predicted perfectly with your cash flow model. Why do you think so many corporations in the US are sitting on a ton of cash ever since the crash of 2008? Pls don't tell me they are all irrational because these firms hire very smart consultants to do their finances. by accounting logic, it doesn't make sense. the only reason you would want to hold onto cash is because you're uncertain about the future, and you're trying to cushion yourself for mistakes. I don't know enough to stand in the shoes of the financial consultants on wall street, but to me it reaks of uncertainty and being "soft-footed" (unwilling to take risks)
I can tell you that only a handful of companies can have some sort of certainty of the future cash flows. Most tech firms don't know what revenue they will make from quarter to quarter, if you don't have sufficient liquidity to pay back your debtholders on a consistent basis you won't last very long in the industry.
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Russian Federation142 Posts
I still don't understand what inflation or currency has to do with government bonds. Their value is determined on the market, with regards to current interest rate set by bidding. The article doesn't seem to mention anything about the bonds being inflation indexed. (So it's assumed that they are standard fixed interest bonds)
Are you trying to include euro:usd price into their valuation?
Can you guys clue me in on how this is related to the article?
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On January 13 2012 10:22 Glacierz wrote:Show nested quote +On January 13 2012 10:15 Endymion wrote:On January 13 2012 10:12 Glacierz wrote:On January 13 2012 10:08 Endymion wrote:On January 13 2012 10:05 Glacierz wrote:On January 13 2012 09:56 Endymion wrote:On January 13 2012 09:54 JeeJee wrote:On January 13 2012 09:52 Endymion wrote:On January 13 2012 09:46 JeeJee wrote:
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. Euro to USD apparently the euro has been traditionally deflating over 2011, so this would make sense. If the euro's deflation rate exceeds the bond's interest rate, then it's a sound move, just as if the euro's deflation rate was less than the bond's interest rate. nah deflation concerns are beside the issue. glacierz has it right; I forgot the buyers in question are big companies not you and me. They have to put the cash somewhere (no mattress big enough to store billions ) and if you don't trust the banks, where are you going to go? Enough companies must be scared enough to pay the gov't to hold their cash for them why not just invest their money into assets or ownership in other companies then though, which would have a much larger margin of return.. it must have to do with risk, but i find it strange that EU corporations would be so scared of both domestic and international stability that they would turn to governments, seeing as the US economy is in a substantial upswing at the moment. I'm a US student so I really admittedly don't have much knowledge of the EU economy in terms of speculation other than basic theory. Let's say I need this money 6 months from now to buy new equipment for the firm. How do I make sure I will have exactly this much in 6 months, but nothing less? the same way that any corporation would do it, probably calculating predicted book cash flows six months into the future, and then planning to sell shares/expand less in the period of 6 months to make sure you had the money to buy it. By your logic, it wouldn't make sense for corporate to own cash at all on their balance sheet, as everything can be predicted perfectly with your cash flow model. Why do you think so many corporations in the US are sitting on a ton of cash ever since the crash of 2008? Pls don't tell me they are all irrational because these firms hire very smart consultants to do their finances. by accounting logic, it doesn't make sense. the only reason you would want to hold onto cash is because you're uncertain about the future, and you're trying to cushion yourself for mistakes. I don't know enough to stand in the shoes of the financial consultants on wall street, but to me it reaks of uncertainty and being "soft-footed" (unwilling to take risks) I can tell you that only a handful of companies can have some sort of certainty of the future cash flows. Most tech firms don't know what revenue they will make from quarter to quarter, if you don't have sufficient liquidity to pay back your debtholders on a consistent basis you won't last very long in the industry.
fair enough, but bonds aren't exactly the most liquid of assets, nor do they have the shorts maturity rate, so the companies must be pretty desperate to tie up any substantial amount of assets into an investment with low liquidity for the sake of cushioning uncertain cash flows
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On January 13 2012 10:24 serge wrote:
I still don't understand what inflation or currency has to do with government bonds. Their value is determined on the market, with regards to current interest rate set by bidding. The article doesn't seem to mention anything about the bonds being inflation indexed. (So it's assumed that they are standard fixed interest bonds)
Are you trying to include euro:usd price into their valuation?
Can you guys clue me in on how this is related to the article?
The way government bonds are traded has very little to do with inflation nowadays. Some people who mis-interpret why bonds are trading at negative rates as a sign of deflationary pressure, which is not correct.
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 would insure, so wealthy individuals and corporations are buying short term government bonds and rolling it forward at maturity (these treasury 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.
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On January 13 2012 10:26 Endymion wrote:Show nested quote +On January 13 2012 10:22 Glacierz wrote:On January 13 2012 10:15 Endymion wrote:On January 13 2012 10:12 Glacierz wrote:On January 13 2012 10:08 Endymion wrote:On January 13 2012 10:05 Glacierz wrote:On January 13 2012 09:56 Endymion wrote:On January 13 2012 09:54 JeeJee wrote:On January 13 2012 09:52 Endymion wrote:On January 13 2012 09:46 JeeJee wrote:
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. Euro to USD apparently the euro has been traditionally deflating over 2011, so this would make sense. If the euro's deflation rate exceeds the bond's interest rate, then it's a sound move, just as if the euro's deflation rate was less than the bond's interest rate. nah deflation concerns are beside the issue. glacierz has it right; I forgot the buyers in question are big companies not you and me. They have to put the cash somewhere (no mattress big enough to store billions ) and if you don't trust the banks, where are you going to go? Enough companies must be scared enough to pay the gov't to hold their cash for them why not just invest their money into assets or ownership in other companies then though, which would have a much larger margin of return.. it must have to do with risk, but i find it strange that EU corporations would be so scared of both domestic and international stability that they would turn to governments, seeing as the US economy is in a substantial upswing at the moment. I'm a US student so I really admittedly don't have much knowledge of the EU economy in terms of speculation other than basic theory. Let's say I need this money 6 months from now to buy new equipment for the firm. How do I make sure I will have exactly this much in 6 months, but nothing less? the same way that any corporation would do it, probably calculating predicted book cash flows six months into the future, and then planning to sell shares/expand less in the period of 6 months to make sure you had the money to buy it. By your logic, it wouldn't make sense for corporate to own cash at all on their balance sheet, as everything can be predicted perfectly with your cash flow model. Why do you think so many corporations in the US are sitting on a ton of cash ever since the crash of 2008? Pls don't tell me they are all irrational because these firms hire very smart consultants to do their finances. by accounting logic, it doesn't make sense. the only reason you would want to hold onto cash is because you're uncertain about the future, and you're trying to cushion yourself for mistakes. I don't know enough to stand in the shoes of the financial consultants on wall street, but to me it reaks of uncertainty and being "soft-footed" (unwilling to take risks) I can tell you that only a handful of companies can have some sort of certainty of the future cash flows. Most tech firms don't know what revenue they will make from quarter to quarter, if you don't have sufficient liquidity to pay back your debtholders on a consistent basis you won't last very long in the industry. fair enough, but bonds aren't exactly the most liquid of assets, nor do they have the shorts maturity rate, so the companies must be pretty desperate to tie up any substantial amount of assets into an investment with low liquidity for the sake of cushioning uncertain cash flows
Well we are talking about T-bills being negative, which is only 6 months. Plus, they can be used as cash-equavalents to pay off debt by quickly selling the T-bills for cash at the same rate you paid for (assuming ~0% rate), most debt holders would even accept t-bills as a valid form of payment because it is technically risk-free assuming the government doesn't default on its debt. The U.S. got pretty close though with the debt ceiling debacle not long ago.
If you hold a 1 dollar bill in your hand, that one dollar bill's purchasing power is backed by the U.S. government in a similar way longer dated treasury notes are. Why do people use dollars to exchange goods / services? because the government guarantees its value (back in the old days it's even pegged to gold so inflation would be totally controlled).
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Russian Federation142 Posts
Endymion:
The market competition to buy bonds bids for the lowest interest rates. Lower interest rate bidders win. Negative interest rates mean incredible competition and very high liquidity. Incredible competition means people are expecting the interest rates in the future to decrease further.
Problem?
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On January 13 2012 11:01 serge wrote:
Endymion:
The market competition to buy bonds bids for the lowest interest rates. Lower interest rate bidders win. Negative interest rates mean incredible competition and very high liquidity. Incredible competition means people are expecting the interest rates in the future to decrease further.
Problem?
Lol what? I can't tell if this is troll or not.
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EPT
