Negative forward interest rate
How is this possible?
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no, that would be the equivalent of being paid to take money.
it seems to me that it would be possible since it is geometric
(1+spot rate)^4 = (1+ forward1)(1+forward2)(1+forward3)(1+forward4)
the spot rate wouldnt be a neg
I said a negative forward.
Maybe it could happen during a war, if there were very few places to store your cash and holding it yourself was dangerous, someone might offer to mind it for you for a commission. Sounds unlikely but that's all I can think of.
theoretically it could happen if all we had was M1. today though it could never happen with M2 and M3.
Hmm. This could technically be possible, perhaps in a Japanese yield curve environment when hyperinflation is expected. But good luck getting loans in that environment.
estet, listen. with m1 it is theoretically possible. m2 and m3 render it impossible.
also FX rates and trade would be it impossible.
...negative ineterest rates are definitely possible, both forward and spot. In a deflationary enviornment where money was expected to be worth more in the future then it is today somebody would have to pay you to take their money today and return it to them at a later date...a negative ineterst rate. Forward rates might be similarly negative in such an enviornment. Dont really follow why M1, M2, or M3 would have anything to do with it.
...and Miss Ind Japan is just emerging from a period of deflation (arguably)...certainly no hyper-inflation expected there.
in a pure M1 environment. but when you throw in credit and other factors it wouldnt make sense. credit would cease to exist. also, it would destable currency and render it practically useless.
Bondarb, I was talking about the inverted yield curve seen (within the past few decades) in Japan. I'm not talking about Japan now. Also, the inverted yield curve that Japan experienced was not paired with hyperinflation. I was speaking hypothetically about the future.
japans rates are super low and look what occured, all those carry trades and stuff. it just wouldnt happen. the currency would cease to exist.
are you taking about actual negative rates or just inverted forwards? forwards are inverted in the us currently
....an inverted yield curve is not the same as a negative forward ineterest rate Miss Ind...and the japanese yield curve is not and has not been inverted...far from it. Its pretty tough for the curve to be inverted when overnight rates are 50bps, right Miss Ind? For an Investment Banker u dont think to much before u post... Dan bush i dont know what you are talking about either...why would credit cease to exist if interest rates were negative? If their was weak demand for money (ie a reccession)and people expected the value of money to decrease substantially in the future (ie inflation) rates might go negative to clear the market....credit would still "exist" (whatever that means). Sometimes i think u guys really just pull stuff out of ur a$$es....
dan bush here. b/c it just doesnt make any sense. youre being paid to take money. it is basically rendering money useless.
finally, you admit it....
...it makes sense under certain circumstances...but i think what u guys may be trying to ask is if its possible for forward rates to be lower then spot rates as opposed to whether interest rates can be negative. Yes forwards can easily be lower then spot...it just meants that the "carry" (cost of holding) a bet that rates will go down is negative...ie to make money on a bond long over a 1 month time horizon when spot rates are 4.50 and 1 month forward rates are 4.40 u have to have rates go down by more then 10bps...this "breakeven rate" is a reflection of the cost of financing ur trade.
Negative forward interest rates cannot exist. Money is easily stored. If you look in any macroeconomics textbook you'll see that the money demand curve never goes into negative interest rate territory because of the fact that money is easily stored.
The only way that you would pay someone for less money in the future is if it was so hard to physically hold that you would be willing to pay a premium on them physically holding it. I emphasize physically because it's not investing it, it's holding it for a fee. Lock box.
First of all the implied interest rate from a forward can easily be negative, you also get negative interest rates in emerging markets due to government restrictons on moving cash around especially off-shore.
(EM interest rate trader here)
By implied interest rate do you mean expected interest rate? And by negative IR do you mean 'IR less than 0' or are you just saying 'IR1 less than IR0' ?
Can you elaborate please?
BBand is right, listen to him.
And if you want a study in inverted forwards, look no farther than us dollar LIBOR rates.
implied means the rate you would actually get if you did the trade.
re: the negative ir, the terms are not being used cleanly here. bband is taking about actual sub 0 rates. this is is different from the fwd's being inverted (as is currently the case in the US for instance)
Thanks for the clarification, Jimbo. If you'll induldge me, I'd like to understand how this works. I understand how forwards can be inverted and that makes sense. How do the sub 0 rates that bband is talking about happen?
Say 6 month LIBOR is 2% and 3 month LIBOR is 5%. So an inverted LIBOR curve. That means the 3 month forward implied 3 month rate is x where x is:
(1+.02)^(180/360)=(1+.05)^(90/360)*(1+x)^(90/360)
In this particular case x is negative and equals ~(60 bps). I.e. 3 months from now, you'll take a 60 bps haircut by investing in a LIBOR instrument with a 3 month maturity. For example, if I buy 1 bond at par paying LIBOR flat, I'd have to pay out 60 cents??
I don't see how LIBOR can be negative. The real rate can be negative if LIBOR is being set at less than the rate of inflation, but that shouldn't happen. Either way, I'm a bit confuzzled.
The Japanese yield curve has been inverted in the past. At some funds, including the one I worked at, the term "Japanese-style inverted yield curve" is used to refer to the concurrence of events that caused the yield curve to invert in Japan. As I've said before, this was not recently but historically. Not sure where you're getting your data from, Bondarb, but one would think you could at least Google a concept before you make a random statement.
the uk curve is almost continuously inverted...pension fund bid for long dated debt.
Wannabebanker: while your argument has some merit regarding the US Dollar, it doesn't apply to all assets. Look at commodities such as the base metals. High cost of storage result in a curve being in backwardation. Lack of supply can also cause a curve to shift from contango to backwardation.
....the japanese yield curve was last inverted 16 years ago Miss Ind.
Precisely. Were you not listening to me?
...i've never heard the term "japanese style inverted yield curve" and i have traded or been a curve strategist for the past 3.5 years. Since the US yield curve has inverted about 5 times since the last japanese inversion i have a hard time imagining people would associate inversion with japan. I think the people u worked with either were morons or u misheard them..more likely the latter.
No, it was a constant theme around the office. I remember exactly what I heard for all those years... as does my fiance, who worked for years at the same place. Morons they may have been, but they were rich successful morons with a lot of clients.
As I said before, we called it a "Japanese style inverted yield curve" because of the conjunction of events and trends that caused the Japanese yield curve to invert. Not all inversions are the same.
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