Wikipedia:Reference desk/Archives/Humanities/2019 August 21

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August 21

Negative yield bonds

So Germany is now selling bonds with negative yields.[1] That means you pay them some money to buy the bond, and at maturity they pay you back less than you paid in the first place. The incentive to buy (according to the article) is that yields of future issues might go even more negative, which will supposedly mean you can sell your only-slightly-negative-yield bond for a premium. This still sounds like an underpants gnome business plan to me: why would anyone buy your bond later for more than you paid for it, just because newly issued bonds were even worse? Why not just leave the money in the bank? And does it all mean that the .de economy is in deflation? This all seems paradoxical and I have to think there is some tax maneuver missing from the article, or something like that. Thanks. 67.164.113.165 (talk) 21:02, 21 August 2019 (UTC)

This may be the first time for Germany to sell 30 year bonds with negative yields, but they are hardly the first negative yield bonds [2]. As for the reasons why someone would want such a bond, well see these sources [3] [4] [5] [6]. Note as those sources say, some have no choice but to buy bonds. Not really mentioned there directly that I saw, perhaps since it's complicated and understood by hopefully anyone actually investing in bonds but note that government bonds may be considered safer than bank deposits. Nil Einne (talk) 22:33, 21 August 2019 (UTC)

I assume European nations have an equivalent to the US FDIC, which insures bank deposits, but they may also limit the amount insured, in the same manner. Thus, bonds may be safer for those with too much money to invest. SinisterLefty (talk) 23:36, 21 August 2019 (UTC)

They do. Not sure of the rules; I kind of remember German's are up to 500,000€. But I highly doubt it is people who are buying negative yield bonds. Gem fr (talk) 09:51, 22 August 2019 (UTC)

I wonder if the negative yields amount to an asset tax then. If that's what they want, does something stop them from implementing a real one? 67.164.113.165 (talk) 00:59, 22 August 2019 (UTC)

How to avoid de facto asset tax? Start renewable energy company with it? Buy Vomit Comet tickets? Large female-only orgies? Sagittarian Milky Way (talk) 02:22, 22 August 2019 (UTC)

Yes, see deposit insurance. --47.146.63.87 (talk) 06:59, 22 August 2019 (UTC)

You're an insurance company with, let's say, 10 million euros cash in reserve. You need this to be liquid to pay claims when needed. What do you do with it? You could deposit it in banks, but most of it won't be covered by deposit insurance, so it's subject to the credit risk of the banks. (In fractional-reserve banking, a deposit is essentially a loan to the bank.) Banks may also put restrictions on large withdrawals. Or, you can lend the money to the government. The sovereign credit risk of wealthy, stable countries like Germany is perceived to be extremely low; if Germany looked to be in danger of defaulting on its debts, you'd probably have other concerns, like the euro losing value. And their debt is extremely liquid, so it's easy to sell the bonds on the market if you need the money to pay out claims. Sure, you'd like to earn interest, but, oh well; the negative interest rate is just a cost of business. There's always a trade-off; you could be putting the money in riskier debt and earning more interest, but with higher liquidity risk and credit risk. Note that in real terms the interest rate on sovereign debt of many developed countries like Germany and the U.S. has been negative for a while. Attaching meaning to the quoted yield versus the real yield—which is all that matters—is an example of the money illusion. Germany is not currently experiencing deflation, though inflation has been low, below the European Central Bank target, which means some have called for more expansionary monetary policy. --47.146.63.87 (talk) 06:59, 22 August 2019 (UTC)

but you could still just hoard bills in some safe.

Hoarding money in any form (bill in a safe, deposit in a bank...) incurs some risk (and cost to get protection against), so it is not so absurd a move to pay a trusted player to do that. The safest safe in the safest bank is probably more expensive. So it makes some sense to pay to have your money later. That is not the difficult question.

The difficult question is: why don't they have better option?

"I could make money if things get even worse" is speculative af (while bonds are supposed to be more of a hedging tool), and require you to pay upfront to play. Hard to find a worse option...

Only reasonable answer are

1. they immediately resell these bonds (with profit) to someone. Could be China, buying them for some purpose of monetary policy, reserve requirement or Renminbi management. Or some manager of hedging or complex financial tool.
2. some laws require them to buy this bad stuff. for instance: Capital requirement
3. some laws (accounting+taxing rules for instance) at least mitigate the loss enough

Gem fr (talk) 09:51, 22 August 2019 (UTC)