Germany sells 5 year bonds with negative yield

[Ad Orientem]

http://money.cnn.com/2015/02/25/investi ... ond-yield/

[dragoncar]

So who is buying these, really?

[buddtholomew]

So who is buying these, really?

Not unprecedented as treasuries sold at a negative yield during the Great Depression era. If you are concerned with a run on the banks, treasuries at a negative yield are the only alternative. Hopefully capital gains will offset the losses for investors.

[Cortopassi]

I am still not clear, at least at the individual level, why I'd want to hold a manageable amount in cash instead of in a negative yielding instrument?  If I had a choice to put 100k in neg yield bonds, under my mattress, in a safe deposit box, or in a personal safe, why does one choose the negative yield instrument?

Is it really meant more for individuals/institutions who have so much cash that personal holding is untenable?

[Ad Orientem]

I am still not clear, at least at the individual level, why I'd want to hold a manageable amount in cash instead of in a negative yielding instrument?  If I had a choice to put 100k in neg yield bonds, under my mattress, in a safe deposit box, or in a personal safe, why does one choose the negative yield instrument?

Is it really meant more for individuals/institutions who have so much cash that personal holding is untenable?

I am guessing that most of the buyers of these bonds are institutional and/or very wealthy.

[barrett]

I am still not clear, at least at the individual level, why I'd want to hold a manageable amount in cash instead of in a negative yielding instrument?  If I had a choice to put 100k in neg yield bonds, under my mattress, in a safe deposit box, or in a personal safe, why does one choose the negative yield instrument?

Is it really meant more for individuals/institutions who have so much cash that personal holding is untenable?

I think this one comes down to rough risk analysis. You have to assign some small probability to 1) Getting mugged on the way to or from your safe deposit box, 2) Theft either from under your mattress or from the bank, 3) Forgetting where the hell you put all that cash, etc. Any one of these things is extremely unlikely but the chances of something happening are probably greater than 1/2 of 1%.

I think this can only bode well for yields on US 30-year bonds and probably stocks also. Not sure about gold. As others have said elsewhere, this is some kind of major global economic experiment we are undergoing right now with the ultra-low rates and everyone printing money like crazy. Something is bound to pop eventually in some direction.

[MachineGhost]

Not unprecedented as treasuries sold at a negative yield during the Great Depression era. If you are concerned with a run on the banks, treasuries at a negative yield are the only alternative. Hopefully capital gains will offset the losses for investors.

That's news to me.  When did this happen?

Anyway, institutional investors need to be fully invested according to their strategic policy as well as have targeted bonds with pre-defined maturity dates to match their existing liabilities.  Cash doesn't do that job.

[ochotona]

Anyway, institutional investors need to be fully invested according to their strategic policy as well as have targeted bonds with pre-defined maturity dates to match their existing liabilities.  Cash doesn't do that job.

I don't think I'd want to be a corporate treasurer these days.

[buddtholomew]

Not unprecedented as treasuries sold at a negative yield during the Great Depression era. If you are concerned with a run on the banks, treasuries at a negative yield are the only alternative. Hopefully capital gains will offset the losses for investors.

That's news to me.  When did this happen?

Anyway, institutional investors need to be fully invested according to their strategic policy as well as have targeted bonds with pre-defined maturity dates to match their existing liabilities.  Cash doesn't do that job.

There are various articles on the topic if you search negative yield and Great Depression. HB mentioned the same during one of his radio shows.

[MachineGhost]

This seems to explain it:

[quote=http://citeseerx.ist.psu.edu/viewdoc/do ... 1&type=pdf]On December 31, 1932 the New York Times listed the yield on a 3% United States Liberty Bond as -1.74%. This seems impossible. An investor can always hold cash rather than an interest bearing security, so any bond should have a positive nominal yield. It is well known that during the Great Depression the prices of Treasury Bills at auction occasionally exceeded par. But the negative yields were extremely small, on the order of .05%.1 Yields of this small a magnitude can be explained by both the fact that Treasury Bills were exempt from personal property taxes in some states {See Homer (1976) pg. 355.] and that Treasury securities were required as collateral for a bank to hold U.S. Government deposits.2 Negative nominal yields on the order of -2% are an entirely different story. In fact, from mid-1932 through mid-1942, the vast majority of coupon bearing U.S. Government securities bore negative nominal yields as they neared maturity.3

Since negative nominal yields are impossible in a world where one can always hold cash, these securities must have had other attributes that were being valued. During the 1930s, the standard practice of the U. S. Treasury was to issue new bonds with coupon rates that implied market prices above par, but sell them at par. Holders of maturing bonds and notes were given preferential treatment in the distribution of the new issue. Coupon bearing Treasury securities had what was called an 'exchange privilege'. At maturity, they could be exchanged at par for a new issue. Government bonds and notes were not just coupon securities; they were options as well. The option had value that was included in the quoted price. As a bond approached maturity, this premium caused the price to rise high enough that the computed yield was negative.[/quote]

[Ad Orientem]

This seems to explain it:

On December 31, 1932 the New York Times listed the yield on a 3% United States Liberty Bond as -1.74%. This seems impossible. An investor can always hold cash rather than an interest bearing security, so any bond should have a positive nominal yield. It is well known that during the Great Depression the prices of Treasury Bills at auction occasionally exceeded par. But the negative yields were extremely small, on the order of .05%.1 Yields of this small a magnitude can be explained by both the fact that Treasury Bills were exempt from personal property taxes in some states {See Homer (1976) pg. 355.] and that Treasury securities were required as collateral for a bank to hold U.S. Government deposits.2 Negative nominal yields on the order of -2% are an entirely different story. In fact, from mid-1932 through mid-1942, the vast majority of coupon bearing U.S. Government securities bore negative nominal yields as they neared maturity.3

Since negative nominal yields are impossible in a world where one can always hold cash, these securities must have had other attributes that were being valued. During the 1930s, the standard practice of the U. S. Treasury was to issue new bonds with coupon rates that implied market prices above par, but sell them at par. Holders of maturing bonds and notes were given preferential treatment in the distribution of the new issue. Coupon bearing Treasury securities had what was called an 'exchange privilege'. At maturity, they could be exchanged at par for a new issue. Government bonds and notes were not just coupon securities; they were options as well. The option had value that was included in the quoted price. As a bond approached maturity, this premium caused the price to rise high enough that the computed yield was negative.

Holding physical cash can be problematic for the very wealthy and large institutional investors. Also it needs to be remembered that 1932 was the year the stock market hit absolute bottom (roughly -90% from pre-crash highs in Sept of '29). Banks were not insured and were failing at alarming rates in 1932. So if your last name is Rockefeller you need to wonder how big your mattress is.

[ochotona]

Holding physical cash can be problematic for the very wealthy and large institutional investors. Also it needs to be remembered that 1932 was the year the stock market hit absolute bottom (roughly -90% from pre-crash highs in Sept of '29). Banks were not insured and were failing at alarming rates in 1932. So if your last name is Rockefeller you need to wonder how big your mattress is.

Especially since our Treasury is cash hostile, in the sense that we probably won't see a bill larger than $100 ever. FYI, $100 now is the same as $12.79 the year John F. Kennedy took office, and it's the same as $7.70 in 1945.

[Ad Orientem]

Holding physical cash can be problematic for the very wealthy and large institutional investors. Also it needs to be remembered that 1932 was the year the stock market hit absolute bottom (roughly -90% from pre-crash highs in Sept of '29). Banks were not insured and were failing at alarming rates in 1932. So if your last name is Rockefeller you need to wonder how big your mattress is.

Especially since our Treasury is cash hostile, in the sense that we probably won't see a bill larger than $100 ever. FYI, $100 now is the same as $12.79 the year John F. Kennedy took office, and it's the same as $7.70 in 1945.

That is an excellent point. Of course back in the 30's they were still printing larger denomination bills. But as you correctly note, that ship has sailed. On a side note, the famous comedian Jack Benny used to collect $10,000 bills back when they still were printed.

[Pfanni]

Foreign central banks buy these to manipulate exchange rates.
For example, Switzerland wants to drive down the value of CHF. So people exchange EUR for CHF, Swiss central bank prints a lot of CHF, hands them out and ends up with a stash of EUR. They cannot keep the digital EUR currency in Switzerland. If they deposit at the ECB, they have to pay a negative yield of -0.2%. So they buy up AAA EUR bonds and accept a negative yield, but which also includes the possibility of capital gains on the bond.

These developments are quite a bad sign in my opinion. It means that the world is embarking on a full-scale currency war, where every country tries to devalue in an effort to dump deflation on its trading partners (making it cheaper to produce onshore than offshore, thus prompting offshore central banks to devalue in retaliation etc. etc.).

[ochotona]

So Pfanni, what are the implications of this kind of currency war on the four components of the PP? And would there be an optimal time to rebalance?

[Pfanni]

Well, that isba tough questoon, especially for European investors. USD has a lot of structural support as world reserve currency, meaning as the preferred currency being bought up by central banks to manipulate, or as they call it, manage exchange rates. China gobbles up treasury bonds to keep RMB down in order to stay cheap in foreign trade. China does not care about the yield itself.
I own 30yr German Bunds, yielding 1%, less than Japan. Probably the most expensive bond in the world.
I think PP with gold and stock exposure offers enough protection from sudden devaluation.
However, my German Bunds, where is the upside? Even with high bond convexity in mind, best upside potential might be 10%.
I think I will wait a few weeks for ECB QE to start, they want to buy 25% of all Bunds in existence, take a small profit and swap for 30yr treasuries. USD is still the lifeblood od the global economy and the bonds offer tremendous upside when deflation takes hold, because all central banks will want to buy them to manage their exchange rates.