Gyroscopic Investing

Oh boy, what would this mean for the PP?

The yield on some Japanese sovereign debt turned negative Friday for the first time ever, the latest indication of the impact on the bond market of the Bank of Japan's aggressive easing measures.

http://blogs.wsj.com/economics/2014/11/ ... -negative/

Wow...we are in interesting waters. I'd say when your country is devaluing your currency like crazy you have no choice but to go elsewhere. Either switch your cash to a foreign currency or gold. I checked Yen/Gold and it is actually ~up 8% in Yen. 128Kish in Jan 138Kish now.

Possibly buy DXJ which is long Japanese stocks and short Yen?

The Nikkei is up over 7% this year and gold is up 10% or so YTD when converted to Yen. If you figure nothing on cash or bonds, then a Japanese PP is still handily beating inflation/deflation in Japan this year. What it means going forward, I have no idea. In such a long-term deflationary environment, holding 50% in cash is one possible PP tweak.

BTW, does anyone know if Harry Browne (or others) ever addressed a long deflationary slump and the PP? Holding long bonds for the full 30 years is a possible tactic, but it only works in hindsight.

I think this might be a rare case where some hesitancy with respect to rebalancing into long term government bonds could be justified. Reub's idea is not bad. Or one could just put the money that would normally go into LTTs into VT or a global government bond fund (something like BNDX?).

This is embarassing to ask, as someone who loves all this sovereign debt/money business, but how the hell do yields actually go negative?  It isn't actually that there is no coupon payment, correct?

Is it people paying such a premium on existing bonds that the implicit yield on them is negative?

I just don't get how this actually mechanicaly happens.

After you buy the bond, jackbooted thugs show up at your house and take your money!

Pointedstick wrote: After you buy the bond, jackbooted thugs show up at your house and take your money!

Bahaha. 

I knew I'd have to suffer through a few of these kinds of answers, but not from you, PS... Not from you.

I like to keep you on your toes.

But I'm curious too. I wonder if you have to buy it electronically and they debit your account or something? I know German bonds have traded at negative yields recently. Any EU folks around who can fill in some of the details?

Well I doubt they actually get ISSUED at negative yields, but I guess I could imagine that in the ebbs and flows of daily pricing, at times, people are willing to pay such a premium that their return of principal + coupon payment is negative, and hence de facto negative yields.

moda0306 wrote: This is embarassing to ask, as someone who loves all this sovereign debt/money business, but how the hell do yields actually go negative?  It isn't actually that there is no coupon payment, correct?

Is it people paying such a premium on existing bonds that the implicit yield on them is negative?

I just don't get how this actually mechanicaly happens.

That is exactly what happens. You buy the bond and they charge you interest for lending them the money. Or think of it as the safe deposit system for the very wealthy. The negative yield is the fee paid for storing your money.

I don't think any bonds are issued at negative (nominal) yields. Germany issued some 2 year bonds a few weeks ago and since the demand was high, interest was set at 0.00%. The buyers were not retail or institutional investors, but mostly banks. If you later buy the bond in the market at a price above par, then you will technically get a negative interest rate through capital losses.

Negative nominal yields are not really a new phenomenon. When Switzerland was fighting to peg its currency to the Euro, the yield curve turned negative all the way up to 5 year bonds. At one point, yields on 2 year Swiss government bonds were as low as -0.4%.

You can also find yourself earning a negative nominal yield if you bought an inflation-indexed bond with no built-in floor for its face value. In this case, deflation can erode some of the principal.