TFA suggests this is due to structural factors--institutions that are required by law to own AA/AAA bonds. Is this some deficiency in the law or corporate governance, that cash in this circumstance isn't considered a substitute for a negative-yield bond? Its net present value would be greater. I can't imagine a scenario in which you would come out financially ahead from owning a negative yielding bond instead of cash.
We've been on a 10 year run of growing economies after the Great Recession and stocks/equities have price-to-earning (P/E) ratios that are really high—as high as what they often were before other corrections and/or recessions:
> Here’s the price-earnings ratio for the S&P 500 since World War II. Right now it’s hovering a little above 25. In the past three decades, it has never reached that point without leading quickly to either a deep correction or a full-blown recession.
So people are worried about equities and "running to safety" of bonds. But there is a lot of demand for bonds, but only a limited supply: when governments tend go to the market and ask for money, usually private investors ask "what are you willing to pay me for the use of my money?". And private investors get a positive return.
But now it's the opposite: private investors are saying "I'm so worried about my money that I am willing to pay you, the government, to hold onto it". And so private investors get a negative return—because they're worried having the money in (stock) market could be worse than a predictable negative rate from a government.
Between the Summer 2007 and November 2008 the S&P 500 dropped by (IIRC) >40% during the fiscal crisis before the Great Recession: a bond "returning" -1% isn't too bad in comparison.
(In Norway banks only guarantee up to about $200k in the event of a bankruptcy)
> After closing at an all-time high on September 20, the S&P 500 entered a bear market on Christmas Eve. The technical definition is a 20% peak-to-trough drawdown, but I’m willing to give this 19.8% fall the benefit of the doubt.
The S&P 500 then hit another all-time high this year (2019), before dropping back down recently. The US/Trump sabre rattling and introducing tariffs/trade wars isn't helping with confidence either:
Various other stock markets are experiencing drama as well:
Honest question: What advantages do bonds with negative rates have over cash with low positive rates? Do bonds protect against inflation?
The negative rates are in essence what investors pay in order to hold their money in "cash."
Not sure I have an 'answer' but think it has something to do with the demand for money today vs the demand for money tomorrow.
Lots of the world's money is being held in the hands of those with...a lot of money.
Those people tend not to need money to spend it, and are looking for places to park it. Meaning there is a large supply of money today.
Meanwhile, lots of people need money, but there are fewer and fewer places where money can go and get a 10%+ return, so the demand for money today isn't that hot.
If supply is up, and demand is down, the price goes...down.
The 'price' of money today vs money tomorrow is basically the interest rate. So lots of supply, not much demand, and the price has collapsed.
Now why demand and supply are in that position, that's another (harder) story, and one that I've yet to see a good synthesis of.
In an ideal world, the government would borrow money and spend it in infrastructure and social projects; this would keep people employed, and employed people would be saving less for rainy days but spending a bit more, keeping the economy spinning and demand up.
So nowadays people with money don't know where to put it to make it grow, incredibly this has also lead to Bubble 2.0, investors being attracted to startups like Uber or food delivery crap where they use investor money to build tech to exploit the under-employed (see above), because, well, these "unicorns" promise good ROI!
> I would summarize the Keynesian view in terms of four points:
> 1. Economies sometimes produce much less than they could, and employ many fewer workers than they should, because there just isn’t enough spending. Such episodes can happen for a variety of reasons; the question is how to respond.
> 2. There are normally forces that tend to push the economy back toward full employment. But they work slowly; a hands-off policy toward depressed economies means accepting a long, unnecessary period of pain.
> 3. It is often possible to drastically shorten this period of pain and greatly reduce the human and financial losses by “printing money”, using the central bank’s power of currency creation to push interest rates down.
> 4. Sometimes, however, monetary policy loses its effectiveness, especially when rates are close to zero. In that case temporary deficit spending can provide a useful boost. And conversely, fiscal austerity in a depressed economy imposes large economic losses.
On austerity, there's a good book that goes over its origins and history:
Good videos of talks and videos by the author, Mark Blyth, if you do a search.
1) Say I'm a Danish pension fund looking to park my money somewhere super safe. I can buy US government bonds that pay 1-2.5% (depending on length to maturity) and indeed many foreign investors will do this. But I still have some risk there, because what happens if the value of the dollar goes down against the Euro and now I lose 5% instead of making 2%? So I look for something denominated in Euros. I can invest in corporate debt, but that isn't as safe. And for the largest, safest companies, that debt might pay zero or even negative anyway, since it just needs to pay a bit higher than Danish government debt to attract investors. I can buy Euro denominated Greek bonds, but again, not as safe. If I want a super safe investment, I want Euro denominated government debt from a stable government known for paying its debts. And if those governments pay negative interest, I'm stuck and I have to do it anyway, because pension funds aren't allow to take many risks.
2) The same thing with currency fluctuation holds on the other end. If I'm an American, I can buy US Government debt. And most will. But if I think that the Euro is going to rise against the dollar, I can bet on that Danish debt and if the dollar goes down 5% against the Euro, I come out a winner. And I still get the guarantee of the stable Danish government that the debt will be paid in full (in Euros).
Of course, you might wonder, why not store the money under your mattress? You'll come out ahead that way! Of course you will, unless something happens to that money. Imagine you have a million dollars in cash. Would you store that under your bed? Of course not! You'd get a safe. But you need a really good safe for $1 million, so that's gonna set you back 10k, and you still won't sleep well at night. So to sleep better you put your money in a bank. But the bank can't take your money and loan it out profitably, because mortgages are at zero. So they tell you, fine, we'll take your money but we're gonna charge you for the service of keeping it safe. It'll be 1% a year and now you can sleep better at night.
Now, if you are a pension fund with $10,000,000,000 in assets, you can't just go to a local bank. So instead, you invest in government debt, which is really just the government keeping your money safe for you for a fee.
Banks in Europe are charging people a percentage to hold their money? That's a bit of context that helps, since that is unheard of in the US. At worst they charge flat fees, and that's usually for having too little money.
The European Central Bank charges banks negative interest to hold their money for them, which is a reserve requirement. Those costs may be forwarded to customers (but 1% is not a realistic figure).
Either way, you don't want to store your money at a bank beyond what is insured.
> That's a bit of context that helps, since that is unheard of in the US.
As of yet, but that might change.
The ECB requires the reserve be deposited with them? There is no "vault cash" provision like the US?
In the US, the answer is that the Fed says you can't. There's some good discussion on a recent attempt/request to change this at  (Scott Sumner),  (John Cochrane), and  (Matt Levine).
Because state central banks won't take you as a customer because they aren't commercial banks, aren't interested in being commercial banks, and are often legally prohibited from acting as commercial banks.
Also, because negative interest bond rates are produced by the same conditions which motivate negative central bank interest rates, so it's not much of a solution even if it was allowed. Bank deposits and bonds are both ways of loaning people cash you aren't currently using (but demand deposits mean it is legally expected for them to give money back on demand, so usually has lower interest due to the greater convenience.)
...come to think of it, this explains a lot about today's perma-bubble world.
(I'm not claiming this is the reason people hold these bonds, just describing the scenario where they would come out ahead vs. cash.)
Only a few of those get designated as currency manipulators for political convenience.
It is that simple.
The primary tool to manipulate the currency is by introducing additional money into the supply. The primary way to do that is to buy bonds at a premium price (where whoever previously owned the bond and sold it now has new money that didn't exist before, this trickles throughout the system diluting the value of the currency for everyone else). Pushing up the price of bonds pushes down the yield. Newly issued bonds are done at the market price and tolerance (what the market can bear). So if the prevailing rate is 0% or -0.5%, newly issued debt in the same risk range yields 0% or -0.5% too.
"Kyle Bass Is So Bearish On Japan, He Financed His Home In Yen"
"The Dallas hedge fund manager (no relation to the famous Bass family of Fort Worth) is so convinced the Japanese government's profligate spending will drive the nation to the brink of default that he financed his home with a five-year loan denominated in yen, which he hopes will be cheaper to pay back than dollars."
This bet may have paid off. The Yen/USD went from 80-90 to 1 in 2010, to 122 to 1 by mid 2015 with the Japanese move to debase.
Swapping loans is fairly trivial, and would leave one with a mortgage rate competitive with American ones.
Assuming they make money, could they then go sub zero?
The loans are considered assets of the bank, so still increases it's value. And if the loan ends up in an account on their books (there's not that many banks in Denmark), they can then loan out that money again minus the fraction they need to hold.
Need down payment.
Price are inflated by increased demand due to zero interest rates. How much will they drop when they rise?