Negative Interest Rate Bonds

[Liability]

Drudge is presently headlining the French selling bonds at a very slightly NEGATIVE interest rate.

I did not major in Economics.

My question is, therefore, maybe "basic." I dunno.

But if I grasp this correctly, it means SOME investors are willing to pay interest on money lent.

So, I lend you money. As you pay me back the principle in installments over time, I GIVE you a small interest payment on the remaining balance.

Why would anybody choose to do this?

 

[TakeAStepBack]

You have it right. the answer is, noone. unless they is hope the country turns around and the bonds gain interest on the long term.

ZeroHedge posted a while back about Operation Twist and the feds flow of asset purchases. The selling of short/medium mature bonds for extra long mature works out only if the fed continues to buy asset - indefinitely. Otherwise, the long end of the mature curve turns negative, which means that anyone holding them will ditch them because they literally have to pay fo rht eholding. It's economics on its absolute head.

We're gonna be in this boat too eventually without a change.

 

[Trajan]

inflation hedge?

 

[Quantum Windbag]

Left wing hope and change meet economic reality.

 

[TakeAStepBack]

Interest rate - Wikipedia, the free encyclopedia

Negative interest ratesNominal interest rates are normally positive, but not always. Given the alternative of holding cash, and thus earning 0%, rather than lending it out, profit-seeking lenders will not lend below 0%, as that will guarantee a loss, and a bank offering a negative deposit rate will find few takers, as savers will instead hold cash.[14]

However, central bank rates can, in fact, be negative; in July 2009 Sweden's Riksbank was the first central bank to use negative interest rates, lowering its deposit rate to –0.25%, a policy advocated by deputy governor Lars E. O. Svensson.[15] This negative interest rate is possible because Swedish banks, as regulated companies, must hold these reserves with the central bank—they do not have the option of holding cash[citation needed].

More often, real interest rates can be negative, when nominal interest rates are below inflation. When this is done via government policy (for example, via reserve requirements), this is deemed financial repression, and was practiced by countries such as the United States and United Kingdom following World War II (from 1945) until the late 1970s or early 1980s (during and following the Post–World War II economic expansion).[16][17] In the late 1970s, United States Treasury securities with negative real interest rates were deemed certificates of confiscation.[18]

Negative interest rates have been proposed in the past, notably in the late 19th century by Silvio Gesell.[19] A negative interest rate can be described (as by Gesell) as a "tax on holding money"; he proposed it as the Freigeld (free money) component of his Freiwirtschaft (free economy) system. To prevent people from holding cash (and thus earning 0%), Gesell suggested issuing money for a limited duration, after which it must be exchanged for new bills—attempts to hold money thus result in it expiring and becoming worthless. Along similar lines, John Maynard Keynes approving cited the idea of a carrying tax on money,[19] (1936, The General Theory of Employment, Interest and Money) but dismissed it due to administrative difficulties.[20] More recently, a carry tax on currency was proposed by a Federal Reserve employee (Marvin Goodfriend) in 1999, to be implemented via magnetic strips on bills, deducting the carry tax upon deposit, with the tax based on how the bill had been held.[20]

It has been proposed that a negative interest rate can in principle be levied on existing paper currency via a serial number lottery: choosing a random number 0 to 9 and declaring that bills whose serial number end in that digit are worthless would yield a negative 10% interest rate, for instance (choosing the last two digits would allow a negative 1% interest rate, and so forth). This was proposed by an anonymous student of N. Gregory Mankiw,[19] though more as a thought experiment than a genuine proposal.[21]

It's essentially a tax on cash holdings. With the option to buy stock (strong stock) at higher rates. It's literally the equivelant of confiscation and only works for those who are willing and able to take a stock and not hold cash.

 

[BillyV]

Drudge is presently headlining the French selling bonds at a very slightly NEGATIVE interest rate.

I did not major in Economics.

My question is, therefore, maybe "basic." I dunno.

But if I grasp this correctly, it means SOME investors are willing to pay interest on money lent.

So, I lend you money. As you pay me back the principle in installments over time, I GIVE you a small interest payment on the remaining balance.

Why would anybody choose to do this?

According to the Wall Street Journal "Investors are so nervous about the potential loss of capital that they are willing to pay an interest rate just to protect their money."

UPDATE: French Yields Turn Negative As Investors Seek Refuge - WSJ.com

 

[Liability]

Wow. Wouldn't it be safer to buy and hold some tangible assets?

 

[TakeAStepBack]

Yes.

 

[Trajan]

this ...is the money shot

--Spanish, Italian bonds under pressure ahead of meeting

--Spanish 10-year bond yields back above 7%

Italian 10 years are back above 6%...

 

[Staidhup]

So GOLD will rebound from the recent declines until of course they pass an FDR style law prohibiting ownership. On the other hand equities may will get a much needed push.

 

[Liability]

this ...is the money sj\ot

--Spanish, Italian bonds under pressure ahead of meeting

--Spanish 10-year bond yields back above 7%

Italian 10 years are back above 6%...

EDIT:

Oh. I get it.

I missed it the first three times by about a country mile.

 

[Staidhup]

What would be a better is to see those social conscious liberals like Soros buy them up. On the other hand he and his gang are most likely getting set to short the Euro and Dollar.

 

[BillyV]

Wow. Wouldn't it be safer to buy and hold some tangible assets?

Except tangible assets aren't liquid, and if you have to sell them, they may not be worth as much in six months as they are now (i.e. real estate in 2006). On the other hand, if you believe the risk of default on the French bond is negligible, you are assured to get back your money when they mature.

 

[Liability]

Wow. Wouldn't it be safer to buy and hold some tangible assets?

Except tangible assets aren't liquid, and if you have to sell them, they may not be worth as much in six months as they are now (i.e. real estate in 2006). On the other hand, if you believe the risk of default on the French bond is negligible, you are assured to get back your money when they mature.

I see, now. Of course, I don't know that I would gamble very much on any Euro nation NOT defaulting sooner or later (and probably sooner).

If I were wealthy enough to worry like that, I suspect my hedge would be in precious metals and maybe in real estate.

 

[Quantum Windbag]

Wow. Wouldn't it be safer to buy and hold some tangible assets?

Except tangible assets aren't liquid, and if you have to sell them, they may not be worth as much in six months as they are now (i.e. real estate in 2006). On the other hand, if you believe the risk of default on the French bond is negligible, you are assured to get back your money when they mature.

I see, now. Of course, I don't know that I would gamble very much on any Euro nation NOT defaulting sooner or later (and probably sooner).

If I were wealthy enough to worry like that, I suspect my hedge would be in precious metals and maybe in real estate.

They are moving their assets.

Europe's rich move assets amid euro fears | Reuters