UPDATE 1-Germany sells new 30-year bond with negative yield, a first

Reuters ^ | Aug 21, 2019 | Dhara Ranasinghe, Michelle Martin

[Norseman]

The article only covered one sort of buyer, the speculator who expects (hopes) to sell them to the greater fool.

Negative interest rates don’t make sense. Convert your bank deposit to cash and put it in a safety deposit box and wait. You’ll do better.

But there are institutions who buy them despite the negative yield.

Insurance companies just match maturities with expected payouts on policies. If they earn zero on their invested money, they just charge higher premiums when they issue the policies. As long as their actuarial assumptions are correct, they’ll make money even if they earn less than zero on their investments.

Banks are required to hold a certain percentage of assets in government securities and may put up with a negative rate on part of their holdings because they have to meet that requirement.

And pension funds with too much cash are viewed as taking too much risk, so they can be forced to purchase longer-dated maturities to balance their risk profile. (Yes, this is insane, but it does occur.)

And then there are the speculators who think rates will go even more negative and they will sell for a profit.

What’s interesting is that the countries that are going this route are doing it to goose their economies, but their economies remain slow, or even in recession. The U.S. had low short rates during the entire 8 years of the Obama administration and the economy experienced a weak recovery. The fed raised rates the first two years of the Trump administration and the economy did fine. So now we’re emulating Europe and Japan?

[Norseman]

And then I went and forgot the main buyer of negative interest bonds, that being the central banks. Without their buying, we’d very likely not see negative rates anywhere.

What’s interesting about their buying is that they will likely reverse course if inflation ever finally gets above 2% or so (at least in the U.S.). That will be “The emperor has no clothes” day when everyone goes “Duh, what was I thinking?”