Related story - my first job out of school was in investment banking. My desk worked on some esoteric securitization products (basically bonds backed by aircraft and shipping container leases) where all issuance had basically disappeared when I started, which was right after the 2008-9 crisis. These products generally were in the A/BBB area, and generally had traded like high yield bonds before the crisis. When I first started, we struggled to find investors and were generally seeing 6-8% yields on some small deals. By the time I left three years later, yields were getting down to the 4% area, issuance sizes had tripled and new paper was routinely 3-4x oversubscribed. I have some friends who still work there and tell me not only have yields kept coming down, but lower quality leases are being thrown into securitization pools. I 100% agree on all the comments here saying the big story is lower rates driving people into riskier investments. When the next crisis hits, people will talk about how negative rates forced people to reach for junk companies and questionable securitization paper.
> lower quality leases are being thrown into securitization pools
Shocked, shocked, do you hear me!
Not to snark at this poster, but in general,
if we learn anything from experience in markets, we learn:
People want higher returns without higher risks, and
other people can profit from convincing buyers that the returns are higher, or the risks are lower.
Also, money is more nimble than legislation. While
Congress is trying to outlaw the most recently
exposed scam or malfeasance, people are inventing the
next several workarounds to existing or upcoming law.
Yes, but... isn’t this basically a bunch or rich folks saying “I was forced to take risks with my money because treasury bonds barely pay anything!”
My gut response is that, yes, if you’re buying risk-free treasuries, why should you get a return above inflation at all? Rewards and risks should be commensurate.
This fundamental issue with the economy is driven by a couple of factors. Increases in inequality and wealth concentration means there is more money to loan, and an aging population means there are less young people to borrow the wealthy's money.
We have a couple of levers to increase the interest rate. We could reduce inequality to reduce the supply of loan-able funds, we could allow large amounts of immigration to drive up the demand for loan-able funds, or we could keep interest rates high enough that we have a permanently high unemployment.
However I do have a strong worry that natural interest rates are too low for our current inflation. This gives the fed very little room to deal with the next crises. They should probably be targeting an inflation rate closer to 3-4% so we don't run into zero lower bound problems.
> When the next crisis hits, people will talk about how negative rates forced people to reach for junk companies and questionable securitization paper.
> negative rates forced people to reach for junk companies
Negative rates don’t force junky investment decisions. Inflation does.
Inflation is low. Investors choosing junk yielding 4% are not being forced to do so by negative yields (or, in America, low yields). They’re choosing to reach for yield.
You speak as if there is something that can done about it.
There is no way for the government to push rates, especially on exotic collateralized products like you describe. The Fed can play around at the low end and set an overnight rate, but not much else. Historically, the Fed has tried and failed over and over to affect the long end. And it certainly doesn't have the stock to dump long bonds to drive yields up.
Right now, the yield curve is inverted showing how little they actually effect rates. Long run rates are set in the global market.
I think its driving people into riskier investments that still look like a traditional cash instrument from a bank - instead of looking at say equity / income funds.
The whole world economy makes no sense. The finance and tech industries in particular are a mess; there seems to be no correlation between value creation and profit.
Whenever I hear successful entrepreneurs bash cryptocurrencies, I wonder how they can simultaneously hold the following 3 thoughts inside their heads:
- My company became successful in the last 10 years because it added value to the economy.
- Cryptocurrencies became successful in the last 10 years in spite of subtracting value from the economy; they are the exception to an otherwise efficient market.
- Capitalism works.
If cryptocurrencies were an exception to an otherwise highly efficient and meritocratic economy, could we say the same about bonds which have negative yields?
Maybe the following thoughts are more logically consistent:
- My company became successful in the last 10 years because I exploited a vulnerability in the economy.
- Cryptocurrencies became successful in the last 10 years because they exploited a vulnerability in the economy.
- Capitalism doesn't work because it's vulnerable to hacks.
Also, to explain the current bonds situation:
- Bonds can have positive value in spite of negative yields because some investors believe that the vulnerabilities in the economy can be patched (e.g. it's possible to increase interest rates) and that bonds will eventually return to positive yields.
This story somewhat reminds me of The Giant Pool of Money[1], a landmark This American Life story on the origins of the 2008 financial crisis (remarkably) reported in the early-middle stages of the crisis (May 2008). One of the things it points to as fueling the sub-prime mortgage crisis was an impossible-to-meet demand for mortgages to be bundled in to CDOs which lead to mortgage lenders lowering their standards to increase supply to try to meet the demand. Why was the demand so high? During the early-to-mid 2000s the global money supply had basically doubled (the titular Giant Pool of Money) and that new cash needed somewhere "safe" to be parked and CDOs were the highest-yielding "safe" investments.
That pool of money hasn't gone away and the lesson investors seem to have learned from the financial crisis is that the only truly safe investments are government bonds issued by major governments. The demand that drove mortgage lenders to make (in hindsight) irrational decisions to increase supply seems to have shifted over to those government bonds. Because the supply of bonds is fixed by politicians the market is responding as it needs to match demand with supply: lowering rates (effectively increasing the "price" of the bond), even below 0, to lower demand to meet the available supply.
Government rates are set by the market at auction. The government does not set the rate of their own bonds, they just offer to sell a certain amount, and the auction determines the rate.
In the US, the Federal Reserve sets the Federal Funds rate, which is (supposed to be) determined independent of the federal government.
The reason rates are low is because there is a lot of demand, and participants are bidding down the price as they compete to acquire the bonds.
I think many people don't understand how negative rates are possible because they are used to having FDIC insurance for their bank account. The issue is that an entity with billions of dollars to protect (such as a pension fund) cannot rely on the FDIC because of the $250K insurance limit. There are not enough banks in the US to spread billions of dollars across, $250K at a time, even if an entity was willing to manage 10's of thousands of bank accounts. A government bond is generally the safest alternative. When demand for the safest level of protection is high, an entity might be willing to pay for the protection because market conditions make them unwilling to accept greater risk. Personally, I believe this is the main reason for very low rates right now. The big fixed income entities expect an economic downturn. It's just a question of how many months away it is.
This really helps me understand the institutional desire to purchase bonds even at a negative rate (especially when combined with legal requirements around holding safe asset classes).
It seems relatively obvious in hindsight, but I was still having a little trouble getting my head around it until I read this.
> More than a decade on from the credit crisis, inflation is still scarce, with wages increasing only modestly despite large drops in unemployment. The ECB, for example, isn’t expected to get to its close-to-2% inflation target over the next decade, according to a market-derived measure.
I find it baffling how everyone talks as if inflation is some incomprehensible force of nature out of anyone's control, even though it's actually trivial to cause inflation by printing money and buying assets.
> I find it baffling how everyone talks as if inflation is some incomprehensible force of nature out of anyone's control, even though it's actually trivial to cause inflation by printing money and buying assets.
But that is literally the mystery about the contemporary economy. The Fed has been printing money like mad with "quantitative easing", with extremely low interest rates, and Congress helping them along with massive tax cuts, but this is having basically 0 impact on inflation rates. We're printing money like mad and it's seemingly having no effect on prices.
> Why does it seem like nobody (with the relevant authority) is willing to do anything but stand around in paralysis worrying?
Maybe because those relevant authorities are more and more not very good at their jobs. It happened a bunch under Bush and his happening way more under our current POTUS. Unqualified people are being put in charge of large portions of our government, and there has to be some consequence. This might just be it.
Contention: The cultural assumption that saving ought to be rewarded is misguided.
Reasoning: When a bank lets you transform production today into future consumption, it's performing a valuable service for you. Storing your value takes work and the bank deserves to be paid for that service. However, historically, they charged a negative price for this service (positive interest rates), because this service allowed them to make even more money letting other people transform their future production into present consumption. But as fewer people need to borrow and as more people want to save, the market clearing price of savings is approaching and in and cases overshooting 0%.
Extrapolation: There's a fair chance this will be a big deal in the history books we write a century from now. Today's bond prices are telling us that the world is changing. We are going from a world of relative growth, where we needed to delay consumption to juice investment, to a world of a relative stasis, where consumption and investment are in equilibrium. Everyone who said interest rates would bounce back to "normal" after the Great Recession has been wrong. This may be the new normal.
In other words, billionaires/oligarchs have sequestered so much cash that it has outrun investment opportunities. What does that tell you about the theory that tax reduction spurs investment?
The interesting part of this story will be looking back on it in ten years. We are either looking at a situation that is surprising but healthy, or a situation that is verging on being a crisis a very long time coming. So far so good, but I don't like it.
The biggest risk with TARP was inflation. You throw that much money into the economy and normally inflation goes up. Some assets have gone up, but generally inflation is low.
So one of two things will likely happen:
1. Economy will go into recession, feds can’t drop interest rates much more (they are already low), so recession hits hard.
2. Inflation skyrockets and the fed starts cranking up interest rates in an effort to control it. Economy stops growing but inflation continues (hi 1970’s!). People bitch because their paycheck stays the same but he price of milk doubles.
There are lots of smart people worried about a sub 0 percent interest rate, or worry about stagnation. Not to mention my peers in every Industry talking about slowdowns or unprofitable years due to tariffs.
The only people who seem to be enjoying it are exploiting the bubble with high wages and investing companies.
And if you didn't take the investment, your competitors destroyed you.
With negative interest rates, it truly will make financial sense to put all of your money under the mattress, so to speak.
In reality, keeping liquid cash will no longer make any sense whatsoever, and further push all other assets up in value, property and equities for example.
Keep in mind Modern Portfolio Theory, in which we measure the total return of a portfolio, not just the individual components.
A huge number of retirement plans and endowments and pension programs will still hold negative yielding bonds, because they need to diversify their assets.
In theory those safe government bonds will shoot up in price just as equities crash. Because these assets aren’t correlated, your long term return will actually be higher. So, yes, that is probably worth paying a bit of money for.
Interest rates are always positive. You are referring to yields which are part interest rate and part trading issues. Yields can and do go negtaive from time to time from the trading issues around the products. The interest rate (as shown on the coupon payment on the bond) will always be positive.
edit: let me add, I mean the consumer space. There can be some oddity in the bank-to-bank market because of various technical reasons, but it is extremely rare.
In other news, the S&P 500 and Nasdaq closed at record highs on Friday. The obvious explanation for both is there's a lot of money looking for somewhere to park, driving asset prices up and bond yields down.
There's either something not captured in inflation numbers, or most of the stimulus money just got invested and not spent.
I'm sure this is a hugely ignorant question, so I'm asking honestly...
> Some funds track government bond indexes, meaning they must buy the bonds regardless of the yield.
Well, that looks like the problem, to me. How about don't do that? Just choose to invest in literally anything else that doesn't have a known negative ROI.
People invest in bonds because they are safer than stocks. Government, municipal, and corporate bonds pay interest relative to interest rates set by the central bank and how risky they are perceived. Across the bond categories, there will always be funds (ETFs & Mutual funds) backed by these categories of bonds for investors to purchase and their value proposition is that they behave like the underlying asset. It's much more convenient for people to buy shares of a mutual fund or an ETF than to buy individual bonds at an auction, so it's an attractive product for them to offer and take a small management fee on top of.
> Just choose to invest in literally anything else that doesn't have a known negative ROI.
A fund manager who is responsible for creating a product that matches government bonds can't buy something else because it would no longer be what it is intended to be: a product which behaves according to how the underlying asset behaves.
Investors however, will buy other (riskier) products because it doesn't make sense to buy something with zero or negative interest, which puts more money into less safe hands, hence the talk about bubbles. If the only thing that is offering any return is a ponzi scheme and everyone is invested in it because nothing else is offering return, then it's going to end badly for a lot of people.
Because the private markets aren't offering many assets that compare well against these bonds if you take into account returns, risk and liquidity.
BTW this is normal. Historically, negative real returns on stores of value were the norm. Before financial systems existed, almost all investments had negative returns if you didn’t put work and energy into them. To store value, you had to accumulate stuff, buildings or land. Most options either had high maintenance costs, were subject to risk of damage from natural causes and theft, were very volatile or required hard labor to get production out of.
Even in societies with financial systems, getting low risk, hassle free, liquid, positive real returns has been difficult for most of history. This just reflects the natural laws of thermodynamics that tell us that everything tends to decay without a constant supply of work and energy. In general, most things require maintenance to keep their worth.
The 20th century was probably the most notable exception. Because of unprecedented demographic and technological growth, positive risk free real returns were easy to find. The recency effect probably explains some of the confusion people have about this. It is possible that under favorable conditions, wealth can have positive returns and even compound into very good long run returns but it is not a guarantee and there is nothing natural about it. It may not continue forever, particularly amidst an aging and retiring population in a world no longer as rich in easy to exploit natural resources.
While people are used to get negative returns on short term purchases, you buy fresh vegetables at the supermarket, even if they degrade over time, many can’t seem to accept the normalcy of negative returns on longer term assets. In nature, squirrels’ nut caches have a certain percentage of losses from theft and spoilage. Real returns tending towards the negative is natural even if they can seem unusual for humans just out of the 20th century.
No. The investment vehicle should (strive to) attain it's stated goal. If I invest in a fund that tracks bonds, then I expect it to track bonds. I didn't invest in a fund that said it would give me zero percent yield, I invested in a fund that said it would track bonds.
If you want a fund that invests in literally anything that doesn't have a known negative ROI then you need a different fund.
If funds try to do what they think investors want rather than what they said they'd do, then they can get in serious trouble.
1) The funds themselves are specifically designed for people who want their money in government bonds. If that doesn't make sense for you as an investor now, then yes, you should get out of the fund, but the fund is still chartered to cater to whichever (insane) people still wish to be in government bonds in a negative rate era.
2) It's not necessarily bad to have bought into the fund. To the extent that interest rates go down, that means the value of the bonds, and therefore of your shares in the fund, goes up. So you could at least pocket that (one-time) return and move your money into a 0-yielding savings account.
There are often regulations or other structures that govern what kind of assets a pension fund must buy. For example, California's pension fund has a 20 percent fixed income investment target (note CA pension is has somewhat more flexibility than others in what they can do)
Gain via interest is a function of inflation. That is 4% interest in the context of 5% inflation is a 1% loss.
Long to short, in the context of deflation (and associated financial uncertainty) these bonds would be good to have. With the bond curve currently inverted and to many a recession eminent, if the "smart money" is holding these bonds then please sign me up.
I want to give a shout out to Max Keiser and Stacy Herbert over at “The Keiser Report” on RT at https://www.youtube.com/watch?v=u3ojPk8CQns for pointing me towards this eye-opening Bloomberg article. Even though the Bloomberg article is titled “The Black Hole Engulfing the World's Bond Markets” I decided to editorially change the headline to the more meaningful and less metaphoric “The time value of money has essentially disappeared”. I know this is usually against the spirit of HN but I hope you understand why I did it.
This is what's in the episode.
“In this episode of the Keiser Report, Max and Stacy discuss the mainstream financial press turning to the metaphors and analogies the Keiser Report started using a decade ago about the obvious blackhole of debt that would put central bankers into a quicksand of negative rate policy trap. A full 25% of global sovereign debt is now negative yielding with a whopping 85% of German debt negative. This means that the time value of money has disappeared, hence a fundamental law of monetary physics has been broken. So, what is next? They look at the historical break from gold which had provided an anchor to time value, and how that hurtled us over the debt event horizon and into a negative yielding world. They also look at a recent exchange between a CNBC host and the treasury secretary on bitcoin and the dollar.”
I think they are coming to the wrong conclusions. They lost the plot at 7, so 8 is based on bad data.
If the Time Value of Money has disappeared, then I suggest it is the money that is not worth the time. We have many historical case studies that show what happens on a broader time scale when a society's money is debauched.
Time is the one true scarcity we all face. I am working at using it wisely... What have I got to lose? :)
So this still continues because it's seen as short run volatility where the cost of rebalancing and trading out is higher than the expected loss? Or is it seen as a stability measure that protects investments in other asset classes? Or are a lot of investors/managers just asleep at the switch (organizational lagress, internal politics, laziness). Or is it simply market inefficiency?
It is difficult to wrap my head around why price discovery is totally failing here...
* companies are seeing record profits
* profits are paid out to shareholders
* or used to buy back shares
* but not reinvested
* ROI on capital is high
* ROI on work is low
* governments are not investing
* nations have high depts
Apple and the likes are stashing enough cash on island to fund Apollo over and over again.
Take Musk away, who is investing in expensive, risky stuff with actual potential to change things?
I firmly believe that the tax evasion schemes we are suffering from today are making capitalism less innovative. Usually, you would have to invest your profits in growth or the tax man would take it away (and spend it). Now you can just park it on an island and use it as security to lend money against, which you can use to buy back shares.
>Banks see their margins squeezed. They’re earning next to nothing from lending but still need to offer depositors a rate above zero to keep their business.
I disagree. If every bank offers negative interest then savers will have no choice: and if that's what the market says has to happen, it will happen. Negative interest has happened before in history.
[+] [-] pcprincipal|6 years ago|reply
[+] [-] dmckeon|6 years ago|reply
Shocked, shocked, do you hear me!
Not to snark at this poster, but in general, if we learn anything from experience in markets, we learn:
People want higher returns without higher risks, and other people can profit from convincing buyers that the returns are higher, or the risks are lower.
Also, money is more nimble than legislation. While Congress is trying to outlaw the most recently exposed scam or malfeasance, people are inventing the next several workarounds to existing or upcoming law.
[+] [-] nostromo|6 years ago|reply
My gut response is that, yes, if you’re buying risk-free treasuries, why should you get a return above inflation at all? Rewards and risks should be commensurate.
[+] [-] JamesBarney|6 years ago|reply
We have a couple of levers to increase the interest rate. We could reduce inequality to reduce the supply of loan-able funds, we could allow large amounts of immigration to drive up the demand for loan-able funds, or we could keep interest rates high enough that we have a permanently high unemployment.
However I do have a strong worry that natural interest rates are too low for our current inflation. This gives the fed very little room to deal with the next crises. They should probably be targeting an inflation rate closer to 3-4% so we don't run into zero lower bound problems.
[+] [-] kgwgk|6 years ago|reply
There Is No Alternative!
[+] [-] JumpCrisscross|6 years ago|reply
Negative rates don’t force junky investment decisions. Inflation does.
Inflation is low. Investors choosing junk yielding 4% are not being forced to do so by negative yields (or, in America, low yields). They’re choosing to reach for yield.
[+] [-] rolltiide|6 years ago|reply
Yeah but Central Banks that set the interest rates say that too, so this is the worst kept secret known to man
All the comments here and your observation should just be “hey its working”
[+] [-] peisistratos|6 years ago|reply
https://en.wikipedia.org/wiki/Tendency_of_the_rate_of_profit...
[+] [-] jnordwick|6 years ago|reply
There is no way for the government to push rates, especially on exotic collateralized products like you describe. The Fed can play around at the low end and set an overnight rate, but not much else. Historically, the Fed has tried and failed over and over to affect the long end. And it certainly doesn't have the stock to dump long bonds to drive yields up.
Right now, the yield curve is inverted showing how little they actually effect rates. Long run rates are set in the global market.
[+] [-] amiga_500|6 years ago|reply
https://www.bbc.com/news/uk-21863295
Paul Mason, from 2013.
[+] [-] walshemj|6 years ago|reply
[+] [-] cryptica|6 years ago|reply
Whenever I hear successful entrepreneurs bash cryptocurrencies, I wonder how they can simultaneously hold the following 3 thoughts inside their heads:
- My company became successful in the last 10 years because it added value to the economy.
- Cryptocurrencies became successful in the last 10 years in spite of subtracting value from the economy; they are the exception to an otherwise efficient market.
- Capitalism works.
If cryptocurrencies were an exception to an otherwise highly efficient and meritocratic economy, could we say the same about bonds which have negative yields?
Maybe the following thoughts are more logically consistent:
- My company became successful in the last 10 years because I exploited a vulnerability in the economy.
- Cryptocurrencies became successful in the last 10 years because they exploited a vulnerability in the economy.
- Capitalism doesn't work because it's vulnerable to hacks.
Also, to explain the current bonds situation:
- Bonds can have positive value in spite of negative yields because some investors believe that the vulnerabilities in the economy can be patched (e.g. it's possible to increase interest rates) and that bonds will eventually return to positive yields.
[+] [-] MrRadar|6 years ago|reply
That pool of money hasn't gone away and the lesson investors seem to have learned from the financial crisis is that the only truly safe investments are government bonds issued by major governments. The demand that drove mortgage lenders to make (in hindsight) irrational decisions to increase supply seems to have shifted over to those government bonds. Because the supply of bonds is fixed by politicians the market is responding as it needs to match demand with supply: lowering rates (effectively increasing the "price" of the bond), even below 0, to lower demand to meet the available supply.
[1] https://www.thisamericanlife.org/355/the-giant-pool-of-money
[+] [-] dnadler|6 years ago|reply
In the US, the Federal Reserve sets the Federal Funds rate, which is (supposed to be) determined independent of the federal government.
The reason rates are low is because there is a lot of demand, and participants are bidding down the price as they compete to acquire the bonds.
[+] [-] 1e-9|6 years ago|reply
[+] [-] ncallaway|6 years ago|reply
It seems relatively obvious in hindsight, but I was still having a little trouble getting my head around it until I read this.
Thanks!
[+] [-] nshepperd|6 years ago|reply
I find it baffling how everyone talks as if inflation is some incomprehensible force of nature out of anyone's control, even though it's actually trivial to cause inflation by printing money and buying assets.
Then the article links to https://www.bloomberg.com/news/articles/2019-07-05/germany-s... which states that Germany is being paid to borrow money but refuses (against the advice of economists) to actually do this and invest in anything? What?
Why does it seem like nobody (with the relevant authority) is willing to do anything but stand around in paralysis worrying?
[+] [-] efficax|6 years ago|reply
But that is literally the mystery about the contemporary economy. The Fed has been printing money like mad with "quantitative easing", with extremely low interest rates, and Congress helping them along with massive tax cuts, but this is having basically 0 impact on inflation rates. We're printing money like mad and it's seemingly having no effect on prices.
[+] [-] e40|6 years ago|reply
Maybe because those relevant authorities are more and more not very good at their jobs. It happened a bunch under Bush and his happening way more under our current POTUS. Unqualified people are being put in charge of large portions of our government, and there has to be some consequence. This might just be it.
[+] [-] nostromo|6 years ago|reply
That’s more than double the long term stock market return, and it’s (basically) risk free.
[+] [-] tedsanders|6 years ago|reply
Reasoning: When a bank lets you transform production today into future consumption, it's performing a valuable service for you. Storing your value takes work and the bank deserves to be paid for that service. However, historically, they charged a negative price for this service (positive interest rates), because this service allowed them to make even more money letting other people transform their future production into present consumption. But as fewer people need to borrow and as more people want to save, the market clearing price of savings is approaching and in and cases overshooting 0%.
Extrapolation: There's a fair chance this will be a big deal in the history books we write a century from now. Today's bond prices are telling us that the world is changing. We are going from a world of relative growth, where we needed to delay consumption to juice investment, to a world of a relative stasis, where consumption and investment are in equilibrium. Everyone who said interest rates would bounce back to "normal" after the Great Recession has been wrong. This may be the new normal.
[+] [-] aj7|6 years ago|reply
[+] [-] roenxi|6 years ago|reply
[+] [-] refurb|6 years ago|reply
So one of two things will likely happen:
1. Economy will go into recession, feds can’t drop interest rates much more (they are already low), so recession hits hard.
2. Inflation skyrockets and the fed starts cranking up interest rates in an effort to control it. Economy stops growing but inflation continues (hi 1970’s!). People bitch because their paycheck stays the same but he price of milk doubles.
[+] [-] HNisCurated|6 years ago|reply
The only people who seem to be enjoying it are exploiting the bubble with high wages and investing companies.
And if you didn't take the investment, your competitors destroyed you.
Fiat currency is a weird thing.
[+] [-] skybrian|6 years ago|reply
One possible arbitrage here might be for the governments themselves to issue more debt and invest it? (Essentially, this is a government bank.)
But, the market seems to be saying that there are too few good investment opportunities. Maybe consumption should be higher? A UBI scheme might do it.
[+] [-] seibelj|6 years ago|reply
In reality, keeping liquid cash will no longer make any sense whatsoever, and further push all other assets up in value, property and equities for example.
[+] [-] nostromo|6 years ago|reply
A huge number of retirement plans and endowments and pension programs will still hold negative yielding bonds, because they need to diversify their assets.
In theory those safe government bonds will shoot up in price just as equities crash. Because these assets aren’t correlated, your long term return will actually be higher. So, yes, that is probably worth paying a bit of money for.
[+] [-] solotronics|6 years ago|reply
[+] [-] amiga_500|6 years ago|reply
[+] [-] eyeball|6 years ago|reply
[+] [-] turk73|6 years ago|reply
[deleted]
[+] [-] jnordwick|6 years ago|reply
edit: let me add, I mean the consumer space. There can be some oddity in the bank-to-bank market because of various technical reasons, but it is extremely rare.
[+] [-] dehrmann|6 years ago|reply
There's either something not captured in inflation numbers, or most of the stimulus money just got invested and not spent.
[+] [-] andrewflnr|6 years ago|reply
> Some funds track government bond indexes, meaning they must buy the bonds regardless of the yield.
Well, that looks like the problem, to me. How about don't do that? Just choose to invest in literally anything else that doesn't have a known negative ROI.
[+] [-] _croz|6 years ago|reply
> Just choose to invest in literally anything else that doesn't have a known negative ROI.
A fund manager who is responsible for creating a product that matches government bonds can't buy something else because it would no longer be what it is intended to be: a product which behaves according to how the underlying asset behaves.
Investors however, will buy other (riskier) products because it doesn't make sense to buy something with zero or negative interest, which puts more money into less safe hands, hence the talk about bubbles. If the only thing that is offering any return is a ponzi scheme and everyone is invested in it because nothing else is offering return, then it's going to end badly for a lot of people.
[+] [-] BenoitEssiambre|6 years ago|reply
BTW this is normal. Historically, negative real returns on stores of value were the norm. Before financial systems existed, almost all investments had negative returns if you didn’t put work and energy into them. To store value, you had to accumulate stuff, buildings or land. Most options either had high maintenance costs, were subject to risk of damage from natural causes and theft, were very volatile or required hard labor to get production out of.
Even in societies with financial systems, getting low risk, hassle free, liquid, positive real returns has been difficult for most of history. This just reflects the natural laws of thermodynamics that tell us that everything tends to decay without a constant supply of work and energy. In general, most things require maintenance to keep their worth.
The 20th century was probably the most notable exception. Because of unprecedented demographic and technological growth, positive risk free real returns were easy to find. The recency effect probably explains some of the confusion people have about this. It is possible that under favorable conditions, wealth can have positive returns and even compound into very good long run returns but it is not a guarantee and there is nothing natural about it. It may not continue forever, particularly amidst an aging and retiring population in a world no longer as rich in easy to exploit natural resources.
While people are used to get negative returns on short term purchases, you buy fresh vegetables at the supermarket, even if they degrade over time, many can’t seem to accept the normalcy of negative returns on longer term assets. In nature, squirrels’ nut caches have a certain percentage of losses from theft and spoilage. Real returns tending towards the negative is natural even if they can seem unusual for humans just out of the 20th century.
More here "The World Deserves a Pay Raise" (https://medium.com/@b.essiambre/the-world-deserves-a-pay-rai...)
[+] [-] parsimo2010|6 years ago|reply
If you want a fund that invests in literally anything that doesn't have a known negative ROI then you need a different fund.
If funds try to do what they think investors want rather than what they said they'd do, then they can get in serious trouble.
[+] [-] SilasX|6 years ago|reply
2) It's not necessarily bad to have bought into the fund. To the extent that interest rates go down, that means the value of the bonds, and therefore of your shares in the fund, goes up. So you could at least pocket that (one-time) return and move your money into a 0-yielding savings account.
[+] [-] nknealk|6 years ago|reply
https://www.calpers.ca.gov/page/investments/asset-classes/tr...
There's some moral hazard here. The same people who regulate the fund also have the benefit of borrowing money cheaply.
[+] [-] usefulcat|6 years ago|reply
[+] [-] maxerickson|6 years ago|reply
The whole point of the funds is that they manage the buying and management of government bonds, that's the service they provide.
You can buy bond funds that only partially invest in government bonds.
[+] [-] bsaul|6 years ago|reply
[+] [-] chiefalchemist|6 years ago|reply
Long to short, in the context of deflation (and associated financial uncertainty) these bonds would be good to have. With the bond curve currently inverted and to many a recession eminent, if the "smart money" is holding these bonds then please sign me up.
[+] [-] igravious|6 years ago|reply
This is what's in the episode.
“In this episode of the Keiser Report, Max and Stacy discuss the mainstream financial press turning to the metaphors and analogies the Keiser Report started using a decade ago about the obvious blackhole of debt that would put central bankers into a quicksand of negative rate policy trap. A full 25% of global sovereign debt is now negative yielding with a whopping 85% of German debt negative. This means that the time value of money has disappeared, hence a fundamental law of monetary physics has been broken. So, what is next? They look at the historical break from gold which had provided an anchor to time value, and how that hurtled us over the debt event horizon and into a negative yielding world. They also look at a recent exchange between a CNBC host and the treasury secretary on bitcoin and the dollar.”
[+] [-] raintrees|6 years ago|reply
If the Time Value of Money has disappeared, then I suggest it is the money that is not worth the time. We have many historical case studies that show what happens on a broader time scale when a society's money is debauched.
Time is the one true scarcity we all face. I am working at using it wisely... What have I got to lose? :)
[+] [-] jotto|6 years ago|reply
[+] [-] a-dub|6 years ago|reply
It is difficult to wrap my head around why price discovery is totally failing here...
[+] [-] turbinerneiter|6 years ago|reply
* companies are seeing record profits * profits are paid out to shareholders * or used to buy back shares * but not reinvested * ROI on capital is high * ROI on work is low * governments are not investing * nations have high depts
Apple and the likes are stashing enough cash on island to fund Apollo over and over again.
Take Musk away, who is investing in expensive, risky stuff with actual potential to change things?
I firmly believe that the tax evasion schemes we are suffering from today are making capitalism less innovative. Usually, you would have to invest your profits in growth or the tax man would take it away (and spend it). Now you can just park it on an island and use it as security to lend money against, which you can use to buy back shares.
[+] [-] whatshisface|6 years ago|reply
I disagree. If every bank offers negative interest then savers will have no choice: and if that's what the market says has to happen, it will happen. Negative interest has happened before in history.