Negative bond yields
Just want to check my understanding on this. A government issuing a bond at a negative yield implies they are charging you, for example, $1,010 in exchange for $1,000 one year from now. Who would buy this? Or are yields negative relative to a discount rate? People aren't actually losing money on a nominal basis, correct?
If you hold swissy 10Y to maturity, you will lose money. Yes, it is actually a negative all-in yield. No, its not relative to a discount rate.
You can still make money on this if you think yields go more negative, however.
As for why, its due to currency flows. You'll notice that the swiss yields went negative when the franc was de-pegged (and skyrocketed relative to other currencies) in mid-January. Keep in mind that bidding the swiss yield down is equivalent to going long franc and shorting your own currency (if you are a non-swiss investor).
I think this all starts to make more sense when you start thinking about it as a currency trade. Swiss nationals are not buying these bonds at these yields, as far as I know.
Yes, they are essentially charging you. The price of the bond up front would factor in the "charge", rather than any sort of reverse coupon.
Not my area of expertise but I would think that buyers could consist of:
Domestic banks, insurance companies and pensions required to hold reserves in sovereigns
Investors who are worried about a mass banking failure (I would assume that not all countries have FDIC like insurance) and find more comfort in sovereigns, enough to pay a premium
-and number 1-
I wonder if you can deduct the negative yield from your taxes.
If you are losing money on a nominal basis I still don't see how buying this could ever be good. Cash has a 0 yield and is therefore strictly better than a negative yielding bond. What am I missing?
For a retail investor it would not be good, but some of the biggest players in the soverign market arent in it to make money it simply a form of holding a highly liquid asset. They also might not want to risk all that money in a bank because it is not insured. Neither are bonds, but i guess this would be a form of diversification.
You don't lose money if you buy a negative yielding asset, provided you can fund this asset at an even more negative rate. Otherwise, it's all about the various forms of value that bonds represent (e.g. bonds can be used as collateral, which is not the case for cash; bonds are used to satisfy regulatory requirements; bonds can be held as an expression of a view on the ccy; etc etc).
As to cash being an alternative, you need to be able to store cash, which means that cash doesn't actually yield 0 in practice, once you incorporate various costs, such as insurance, vault rental, security, etc etc.
Finally and curiously, in Denmark, a country where rates have been pushed into deeply negative territory, there have been discussions about allowing people to deduct the amounts they pay on deposits from their taxes.
non-domestic investors can make negative yielding foreign ccy bonds value Accretive if the foreign ccy rate appreciates - eg a US based investor buying negative Swissy govt bonds could still make money if the Swiss / USD rate rises over the life of the bond. Don't know whether this is happening in reality though as I'd question why one needs to buy bonds to make a FX bet if that's the purpose.
Yes, it does happen in reality... For a whole variety of investors (e.g. reserve managers), there is no such thing as an FX bet w/o a purchase of some asset that is denominated in the target currency. Specifically, the only way I can be long CHF is by holding a CHF t-bill or a bond or another asset. Obviously, the trade off is whether you want to get a better yield (possibly non-negative) in exchange for bearing interest rate risk.
If you want to long CHF, can't you just long CHF via futures/option? Why would you buy have to buy swiss bond?
Would you say macro funds do the same thing or they just simply long CHF via futures/option without buying the swiss bond?
Ehhhhhh. Not sure what all gibberish written above me is about and I don't want to write a long thesis about this. To keep it simple, nominal yields=real yields + inflation expectations. Aside from capital flows due problem in the EU, the market is really saying (1) Swittzerland is as credit worthy as a bar of gold. Real yields of ~~ 0%. and (2) Inflation (yr/yr change in prices) is expected to be NEGATIVE for the tenor of the maturity, ie utter DEFLATION. Not DISINFLATION but full DEFLATION. Hence you get Negative nominal yields. QED
In a deflationary environment that value of Assets DECLINE. IE if an ASSET was WORTH $1000 today, tomorrow it will be worth $990. The concept of paying the Swiss Govt money, ie negative nominal yields, for a bond DOESN'T sound crazy if expected inflation=realized inflation. When your universe of invest-able assets are all generating negative returns, SWISS sovereigns, a highly credit worth country with large gold reserves, do not seem as a bad of an investment vehicle for protecting the value of your capital RELATIVE to other assets.
Will be starting a PhD in Econ this year, work at a hedge fund but my first job coming out of undergrad was as a central banker at the NY Fed. I'll take my Noble prize now thank you.
Gibberish, eh? Can you, sillymonkey, explain to me, using your foolproof framework, why French bonds, almost up to 5y maturity are even now yielding negative? For your guide, mkt's expectations of EUR HICP (and French CPI, for that matter) inflation over the relevant horizon are firmly positive (latest at arnd 1% and 1.1% respectively).
I am not an expert about the euro, I have a hard time as it is figuring out how the US economy is going to do. Again, I'll repeat, EXPECTED inflation not PAST inflation. You do know the difference between IMPLIED volatility and REALIZED Volatility. I have'nt looked at French soverniegns. If tenors 5 Lower Inflation Expectations.
I wrote approximately sign, the squiggly thinggy. It showed a flat line instead. I am exaggerating of course on exactly 0% real yields. I am sure its something, but obviously the inflation expectation is negative enough to offset the positive value. I still don't recommend owning these bonds by the way. Just explaining this puzzle everyone is thinking about,
My Take On Negative Bond Yields (Originally Posted: 03/24/2015)
Negative bond yields on government debt implies excess risk in the general market that's not being priced correctly. Typically, depressed yields in an asset class will lead to a capital outflow in that class to others until arbitrage equilibrates risk adjusted returns among all asset classes.The fact that this isn't occurring, either at all or to a sufficient degree, implies that the ERP, or compensation per unit of risk, is currently too low in the market. In other words, we're in a bubble - equity prices should be lower.
Thoughts?
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