
Germany for First Time Sells 30-Year Bonds Offering Negative Yields - yasp
https://www.wsj.com/articles/germany-for-first-time-sells-30-year-bonds-offering-negative-yields-11566385847?mod=rsswn
======
apo
For those wondering why anyone would buy such a thing, consider:

\- Many financial institutions are required to hold a certain percent of
portfolio in safe assets. German bunds are among the safest in the world.

\- A holder of a bond earns a capital gain (bond goes up in price) when
interest rates fall. In that sense, zero is no limit at all because there can
always be a buyer willing to accept an even lower (more negative) yield.

\- Bond investors are well-aware of the two points above. When they sense that
interest rates and/or inflation are headed lower, they know they can profit by
buying, regardless of yield.

\- Anticipated rate of inflation matters a lot because investors seeking
return through yield focus on real interest rates (nominal rate - inflation).
Inflation can be negative as well (deflation). If inflation is lower (more
negative) than the bond's nominal return, that's a real _positive yield_. And
that positive yield is locked in for the term of the bond, which in the case
of the story is 30 years.

\- The European Central Bank has repeatedly signaled its belief that zero is
no barrier and that negative yields will be tolerated indefinitely. The ECB
stands ready for quantitative easing (QE), in which the central bank buys
bonds with money it creates from thin air. Investors know this and this
compounds the incentive to pile on and buy bonds to enjoy the capital gains
(and real returns if the investor believes that deflation is inevitable).

It's likely that all these factors combine to create the current environment.
How long all of this can continue is anybody's guess because the situation is
without precedent.

It's as if the financial crisis of 2008 was never resolved - just papered over
through massive central bank purchases of treasuries and stocks (Japan's
central bank owns a major fraction of the value of the Japanese stock market
at this point).

~~~
logicallee
>\- Many financial institutions are required to hold a certain percent of
portfolio in safe assets. German bunds are among the safest in the world.

Can you explain how this can possibly beat cash? If I say to you "I'll let you
pay me ten cents to hold onto your $100 bill for a while, and give you a paper
showing the obligation to repay your $100" (the meaning of a negative yield
bond), how can the offer to let you pay ten cents to let me hold your $100
possibly be less risky than just holding the $100?

Why would a bond with a negative yield ever be a safer asset than just holding
the cash?

~~~
kovek
A lot of commentators are discussing the drawdowns of storing cash bills.
However, who buys bonds by paying with physical cash bills? Most of us have a
number in our bank account that reflects some sort of wealth? (Ownership of a
security elsewhere or an I Owe You?) People with a salary directly deposited
and big companies do not need a bank to store their physical cash bills.

I’m still trying to understand how this all happened.

~~~
whatok
The ECB charges banks -0.40% to deposit money with them. These bonds are
currently yielding -0.14%. Rates are not low enough to the point where
physical cash is a thought. Rough estimates are a deposit rate of -0.75% where
you would make more by holding physical cash.

------
jedberg
The best explanation I've heard for negative rates is this:

Imagine you have a million dollars worth of cars. If you want to store that in
a bank, you'd pay them money to do so. Why? Because the car has no value to
the bank. The only thing they can do is store it in the vault, which requires
security personnel, space, climate control, etc.

Now instead you have a million dollars in cash. In the current environment,
where more people want to put money into the bank than take it out, the cash
also has no value to the bank. They can't loan it out again because no one
wants to borrow that much. So they charge you for storing your money. This is
how they make a profit. By slowly taking your balance, since they can't make
money loaning it out.

A negative interest rate basically means more people want to save money than
spend money. When the government offers negative rates, it's because they want
people to spend money instead of save it. When a bank does it, it's because
more people are putting money in than taking it out.

~~~
samsonradu
"It used to be a respectable thing to save money, now you're just hoarding
cash!" \- @Hipster_Trader

~~~
Dylan16807
A fun comment, but it's a really easy paradox to solve.

If you have less than 1 million dollars you should be saving money. If you
have more than 10 million dollars you have too much money.

------
TheSoftwareGuy
I feel like I still don't understand negative yields, despite really trying
to.

Negative yields means that I put in $X (or euro/whatever germany is using) and
I later am guarenteed no more than $Y out of the exchange, where Y < X. I am
literally guaranteed to lose money. I could just hold on to my money, "keep it
under my mattress" and still make a better ROI than bonds with negative
yields. Why would anybody buy these bonds?

~~~
snowwrestler
There are dozens of answers here that explain why institutions buy sovereign
debt, in general.

What those comments don't explain is why anyone would buy _this particular_
sovereign debt.

So: why would anyone buy negative-interest-rate German bonds when U.S.
Treasury bonds still have positive interest rates, and are available in much
higher volumes?

~~~
hendzen
[https://en.wikipedia.org/wiki/Interest_rate_parity](https://en.wikipedia.org/wiki/Interest_rate_parity)

~~~
mdemare
Yes. The difference in interest rates implies that the EURUSD exchange rate is
expected to rise (slowly) in the coming decades.

------
nostromo
This is the real reason the US yield curve looks the way it does.

All other developed countries are selling negative or near zero government
bonds. This has lead to huge international demand for US 30 year treasuries.

[https://tradingeconomics.com/bonds](https://tradingeconomics.com/bonds)

US treasuries are giving a greater yield than _Italy or Spain_ for reference.
Of course there will be huge demand.

Central banks are no longer islands. They are part of the global economy and a
part of a market just like any other. The US acting alone to raise interest
rates won't work like it did in previous cycles.

~~~
robocat
Alternatively investors holding USD may believe that EUR will strengthen
against USD over 30 years by more than:

0.5% + US_30year_treasury_bond_rate + risk_adjustment

A negative interest rate is fine for US investors if you think the exchange
rate will shift enough in your favour to cover your costs.

~~~
robocat
Happened before:
[https://www.bloomberg.com/opinion/articles/2019-08-22/swiss-...](https://www.bloomberg.com/opinion/articles/2019-08-22/swiss-
history-of-negative-interest-rates-is-ugly)

------
thorwasdfasdf
I understand that policy makers think that low interest rates will encourage
people to put their money into investments like the equities or a business by
forcing people out of saving. But, have they ever considered that they may
actually be achieving the opposite? Someone who just turned 65 (like aging
Europe), really really needs to save in safe assets. Negative yielding bonds
don't change that need! So, instead of investing in risky assets, they may
simply take the negative yield and save even harder to make up for the
negative yield thus reducing spending even further and hurting the economy.

~~~
elcomet
I think that's the point isn't it? To provide extra-safe assets for people who
need it.

~~~
thorwasdfasdf
Their objective is that people won't save the money. They want people to spend
the money, the sooner the better, but that goal completely contradicts what a
retiree (and aging population) needs/wants to do.

------
turbinerneiter
The most fascinating thing is here is that the German government still refuses
to take this basically free money to invest in infrastructure.

~~~
rossdavidh
I'm not saying your point isn't valid, but:
[https://en.wikipedia.org/wiki/Berlin_Brandenburg_Airport](https://en.wikipedia.org/wiki/Berlin_Brandenburg_Airport)

Not all German infrastructure spending turns out well.

~~~
turbinerneiter
BER is it's own special case, but the general gist I'm piecing together from
media reports is that Germany has a planning problem because there are not
enough government workers to plan projects.

For example, there is a budget reserved for infrastructure. The poor regions
often fail to produce good enough project plans in time. The richer regions
have more planners and present additional projects at the end of the year to
get the left over money.

------
gzu
I’m starting to entertain the idea of a massive bubble in bonds. Is inflation
really never going to show again? I can’t understand why anyone would want to
hold a fiat currency for 30 years for no return.

Is it due to portfolio theory where the assumption is stocks and bonds yields
have inverse correlation and the way to manage risk is to have a correct
ratio? Due to global QE there is too much money floating without enough to
invest.

What’s the alternative to equities and/or bonds

~~~
adventured
> Is inflation really never going to show again?

In developed economies money is being removed nearly as fast as it's being
added, in the form of going into the blackhole of low to negative yielding
paper. It's removing a present ~$17 trillion of capital that could otherwise
be sloshing around pressing inflation higher. That's an extraordinary amount
of money that has largely been rendered non-impacting. There are only a few
areas where you see any inflationary pressure in the US, such as in assets
like equities and real-estate, due to the Fed rates. In that case you've got
people with immense collective free capital pressing aggressively upward on
prices (willing to pay a high premium to try to get a return beyond what eg
treasuries are offering).

It's why Japan can never spark traditional inflation (nor achieve any growth).
Their epic pile of low yield debt has sucked a lot of the loose capital out of
their economy. It's a giant pile of non-productive, non-active, ineffectual
capital. Instead of going toward wage pressure / competition, growth, business
formation & loans, VC, productivity investments, R&D, et al.

If you could unleash $20-$30 trillion of increasingly low yielding debt back
into the US economy, inflation would skyrocket and it would demand far higher
rates to control inflationary pressure.

It takes several things working in tandem to result in this unusual outcome.
Countries outside of the developed world - the first tier, affluent economies
- have a near impossible time achieving such low or negative yields, and lack
of inflationary pressure.

~~~
marvin
I still don't understand this at all. Is all this money that's being parked in
almost no-yielding bonds just going to stay there forever, never to be used?

What does this say about the state of the economy or the
expectations/psychology of whomever buys them?

There's either something very hard to understand that's happening to the world
economy, or it's just a strange phenomenon that people pretend to understand
but don't.

~~~
jdhn
>Is all this money that's being parked in almost no-yielding bonds just going
to stay there forever, never to be used?

The money can come back out, however it seems very difficult to see when
that'll happen. That being said, if it does happen, I think we'll see a lot of
inflation due to the sheer amount of money that would be pouring into the
system.

------
docker_up
Where can I put my money to take advantage of this? Gold? or just US
treasuries?

~~~
danieltillett
Gold miners. With physical gold you have to worry about storage, but gold
miners solve this problem. The gold miners have run pretty hard already, but
the developers (those building a new gold mine) have not yet moved that much.

~~~
cududa
Both having gold stored somewhere and gold mines assume in the event of the
collapse of civilization they’d leave the assets as is.

~~~
danieltillett
If there is a collapse of civillzation the last thing anyone is going to be
worried about is their investment returns.

Gold as an asset class does well in periods of low real interest rates. All
signs suggest we are going to be in a low real interest rate environment for
sometime.

One of the nice things about investing in gold miners over just gold is in
trying to find the best ones. There is real alpha in this as not all gold
mines and gold miners are equal.

------
jnordwick
So it is a zero coupon bond sold above par, but this doesn't mean the bank
isn't making money off of it. There are a lot of technical reasons that these
can be purchased (such as a tax advantaged stutus or a requirement to hold
certain duration on a portfolio). I'm an expert on German bond market, but I
expect the actual yield to be positive after taking into account other factors
(or there being some regulatory reason). Last time I saw an article on a
negative yield mortgage, there were tax resons it was actually coming out
positive.

~~~
whatok
I'm looking at the bond on Bloomberg right now and it's showing a yield of
-0.14% with a price of EUR104.54. All things equal, if you buy this bond right
now and hold it to maturity, that will be your yield. This is an after-tax
yield.

I'm not sure what bank you are referring to in the first sentence. These are
bonds issued by the country.

~~~
jnordwick
Any after tax yield is going to be an estimate. i no longer have access to a
bloomberg login, but does it give its methodology? @ 104.54, YTM would be
-0.44 not taking other factors into account. There could also be technical
reasons such as collateral requirements or other banking/trading requirements.

> I'm not sure what bank you are referring to in the first sentence. These are
> bonds issued by the country.

The purchasing institutions, not the issuing. These mostly banks aren't just
giving money away, and they don't really have costs associated with carrying
base money since they can just ship cash back to the central bank for reserve
credit, i assume under most conditions.

And the can always go elsewhere in the eurozone for yield, but they seem to
need bunds for particular reason. not sure, i just pretty sure they aren't
giving money away for no reason. they could even lay off currency risk and go
for US Tsy.

------
sunseb
Do you think it's a good idea to put some savings in gold?

~~~
ThrustVectoring
The stereotypical HN reader (age 20-40 tech professional) should have three to
six months of salary in cash (interest-bearing savings/checking/money market
account), rest in low-cost equity index funds (I use 60% VTI / 40% VXUS).

Gold is, IMO, a disaster preparedness thing you buy after purchasing a
shotgun, ammunition, and a month's worth of canned food. The main use case for
gold is as highly portable physical wealth - in highly messed-up situations,
you retain at lease some ability to engage in limited amounts of commerce to
get yourself to a more stable situation.

~~~
ant6n
That's an interesting implied point. Does it make sense to hold gold on paper,
if it's mostly useful in highly messed up situations where paper gold would
become worthless?

~~~
ThrustVectoring
Yeah, I wouldn't do that. Security costs for physical gold are already low if
you have a way to securely store a shotgun, most of what you're dealing with
is a wider buy/sell spread, which is pretty small overall.

The problem with "paper gold" of various sorts is that it usually winds up
being a promise to give you a certain number of dollars based on the spot
price of gold. This is a problem if dollars stop being of practical use.

There's still a hell of a lot of things that are better to do before buying
physical gold here, of course. Bigger risk-mitigation moves are like, minor
emergency preparedness, own-occupation disability insurance, term life
insurance, and dumping a ton of money into the stock market for getting enough
long-term price appreciation.

------
jchrisa
Slightly OT but I’ve been trying to google this for a while and there are
people reading this who will know where I can look:

If a government (pretend US if it helps) stopped collecting taxes, and instead
funded the budget by printing money every year, who would be the winners and
losers compared to the current system? Where can I go to learn more?

~~~
throwaway123156
I suppose it would lead to inflation and as long as the inflation is
controlled, that's doable.

Effectively, the government is being funded by all dollar holders at that
point. It's a wealth tax of sorts imposed on those who hold their wealth in
dollars.

The idea would be that the government is being funded by the fact that $100
today, is worth only about $90 last year, and that loss in value is what's
funding the government.

~~~
tempestn
This might explain why the idea is more popular on one side of the political
spectrum. What's interesting though is that thus far it doesn't seem like the
expected inflation has been happening in the US, despite significant deficit
spending. Any idea why that might be? What I've heard is a lot of, "Current
levels of deficit spending are sustainable because we're not yet seeing a
resulting increase in inflation." Which makes sense. But.. what's the
mechanism for that? Like, taken to an extreme, if a government did indeed stop
taxing and pay for everything with deficit spending, but there _wasn 't_
inflation as a result, how would that be?

The only explanations I can think of are that 1) many other countries are also
doing significant deficit spending, so all major currencies are being devalued
together, and so they're not actually being devalued at all, and 2) in as much
as (ie) the US currency is being devalued faster than others, there are other,
strengthening factors that are counteracting this. (Such as higher interest
rates.)

~~~
henryfjordan
I'm not an expert and expect this to have flaws but here goes:

Fiat currency is backed by value (not gold, but also not nothing like some
people say). It's worth what we all collectively think it's worth and that's
going to depend on the underlying assets of a nation.

Lets say there are $1T dollars floating around the economy and this year the
Fed wants to print another 100bn. That's totally ok (and necessary) so long as
there was that much value created this year. New factories have been built,
businesses created, etc. This has created more underlying value in America and
so it's ok that we print some more money. Your $1 bill still holds the same
amount.

That's how I look at it at least.

------
yasp
If central banks weren't setting the price of credit by fiat, what would a
"market" risk free rate be? Have any economists tried to answer this question?

Edit: not sure why I'm being downvoted for this...?

~~~
dredmorbius
A fair question, and there's an argument that's been made (though I'm unable
to recall precisely where I ran across it, possibly in a New Books in
Economics podcast) that while interest rates might once have been considered
exogenous (market-determined) they are now endogenous (central-bank
determined).

Which would mean that interest rates are (more or less) what CBs want them to
be, at least within the bounds defined by inflation. Which presumably they
want to be kept low presently.

~~~
yasp
Are you maybe thinking of what MMTers e.g. Warren Mosler assert? (E.g., Mosler
calling for 0% interest rates, always.)

If you can think of source, please let me know. Sounds interesting.

Edit: It also sounds fallacious to me. Interest rates are central-bank
determined because the central bank chooses to determine them. In the absence
of a central bank controlling rates, there undoubtedly would still be interest
rates. There ostensibly also still would be risk free rates. In some
hypothetical parallel Earth, the Fed might instead choose to control the price
of some other commodity, like oil. That doesn't mean that the price of oil
would be "endogenous" and therefore that there's no market price. Just that
the Fed had chosen to suppress that market price. Thus, as far as I can tell,
it still makes sense to ask the question "what would be the market risk free
rate?"

~~~
dredmorbius
It _might_ have been John Quiggan, in this interview:

John Quiggin, "Economics in Two Lessons: Why Markets Work So Well, and Why
They Can Fail So Badly" (Princeton UP, 2019).

Media:
[https://traffic.megaphone.fm/LIT7223813423.mp3](https://traffic.megaphone.fm/LIT7223813423.mp3)

... and if it's not, it's still a good interview to listen to (I'm giving it a
repeat). Long, but informative.

The other likely candidate was a Marketplace Radio segment a few weeks back.
I'd have to go hunting for that.

------
a11yguy
Another reason, I've not seen mentioned, is that you think bonds will go even
more negative, so you buy now, to avoid having to buy a much more negative
rate later.

------
fourstar
Those of you (US) with large stock/cash positions: what are you doing to
weather the (inevitable) storm? Feels like we’re in the doom and gloom media
phase. I suspect lots of people will start forgetting within the next 6 months
in which the stock market will go sideways, until the next catalyst which is
the US election cycle.

~~~
rifung
> Those of you (US) with large stock/cash positions: what are you doing to
> weather the (inevitable) storm

I follow the traditional advice of doing nothing and not trying to time the
market.

~~~
twoheadedboy
Yeah I get that. What about for people like me who are trying to enter the
market? I'm wondering if it's worth it to wait and see, or if I should just
not worry too much and invest now anyway.

~~~
notJim
Time in market beats timing the market.

~~~
czbond
True, but time in market with educated and not naive timing beats "time in
market". Edit: "naive", and that I simply mean to time ETF payments with
awareness and possibly technical indicators.

------
whatok
Like most economic and finance topics on this site, there seems to be a lot of
people posting opinions/"facts" without really understanding the subject
matter.

The reason why bonds are trading at negative rates in the EU are the
following:

* The ECB deposit rate is -0.40%. Everything else is benchmarked against that

* The majority of the EU is either currently in a recession or rapidly heading there

* Inflation expectations are weak

