UPDATE 2-Germany becomes second G7 nation to issue 10-year bond with negative yield

Reuters ^ | July 13, 2016 | Dhara Ranasinghe

[C19fan]

Germany on Wednesday became the second G7 nation after Japan to issue 10-year bonds with a negative yield, highlighting a willingness among investors to hold top-rated debt even as yields across the world collapse.

Germany's 10-year government bond yield turned negative for the first time at an auction, fetching the lowest average yield on record for such paper at -0.05 percent.

[C19fan]

Swiss sold 42 year bonds, what a weird maturity, for negative yields.

[Red Badger]

Why would anyone buy them?......................

[Blood of Tyrants]

People who believe that the stock market is going to crash hard. People with no faith in banks.

[Red Badger]

People who are betting on ‘de-flation’..................

[Captain Rhino]

Good question.

Traditionally, positive interest is a hedge against inflation.

What expected economic situation 10 years from now would make it acceptable to have 5% LESS than the initial investment - especially for institutional investors?

This is loss transference from the government to the lender.

The government borrows the money with the promise to pay back less in 10 years with inflated money - maybe massively inflated money. The lender (ECB?) is essentially making a gift of the negative interest and the depreciation in the purchasing power of the currency (due to inflation) to the governments it is buying the bonds from.

[Norseman]

>>What expected economic situation 10 years from now would make it acceptable to have 5% LESS than the initial investment - especially for institutional investors?<<

It was sold at a negative yield of .05%, not 5%, so the lender is getting back about fifty cents per year less than he lent per $1,000 bond. That’s about $5 in total, so the lender paid around $1,005 to get back $1,000 in ten years. That’s 5/10 of a percent, not 5%.

As for why an institution would do it, really only an institution would, or someone with so much wealth that they couldn’t just safely hold the cash instead. Think of the $5 as a safe deposit box rental, because that’s essentially what it is, although on, say, an “investment” of $100 million, that rental fee becomes a pretty stiff $500,000.

This whole affair is more than likely just another modern tulip mania. It will end very badly, especially in the U.S. where the deficit is out of control and the Fed doesn’t dare raise interest rates due to the damage it would do to the federal budget.

[Captain Rhino]

“As for why an institution would do it, really only an institution would, or someone with so much wealth that they couldn’t just safely hold the cash instead. Think of the $5 as a safe deposit box rental, because that’s essentially what it is, although on, say, an “investment” of $100 million, that rental fee becomes a pretty stiff $500,000.”

Thanks for pointing out my misread of the percentage. Makes a lot more sense at .0005 than at .05.

In the case of the large holder ($100 million) discussed above, is the risk due to the fact the “cash” (which is really mostly electronic)is being held in a commercial institution vice the government?

By this I mean that, if the institution mismanages investments, goes bankrupt, etc., deposits are at risk to creditors in liquidation. However, the money on “deposit” with the government is backed by the full faith and credit of the nation (in the case of the US Government) and can be repaid through the government’s continuing stream of tax revenues.

And, as you say, negative interest rates are a sweet deal for the government since they are being paid “rent” to store the money. Except it isn’t really being stored ....

[Norseman]

Yes, to the extent that the government doesn’t guarantee deposits you’re right. A deposit would have less security than a government bond, presumably. Although I could envision a scenario in which a private bank made good on its deposits while a profligate government was at the same time giving every bondholder a “haircut” when the bonds matured.

Actually, though, a good part of the reason for the negative yield might be due to a market mania of sorts. Just as people pay astounding prices for stocks that turn out to be worthless shortly thereafter by chasing a stock (or even a house) all the way to the top, sure that they’ll be able to sell to a higher bidder, some buyers no doubt expect to sell the bonds to others at an even higher price (and an even greater negative yield) at some time in the near future.

For example, a large portion of government bonds sold at auction in the U.S. are usually purchased by dealers intending to resell the bonds. That could be the case in Germany as well. I don’t know though.

I continue to think that this is just another tulip mania that will end very badly for those who end up holding the bonds when the mania ends.

[Captain Rhino]

“Tulip mania.” Understand the reference and the apt picture it draws of frenzied buying and selling.

I wonder what the Dutch is for:

“Where were you when tulips turned back into ordinary flower bulbs?”

Thanks for taking time to post your insightful replies.