The latter is the biggest reason. Institutional funds are required to purchase these “low risk” items and many would argue is artificial demand so it ends up doing more harm than good.
Re:Interest Rates: Naturally Negative?
by somebodythere on Tuesday August 13, 2019 @04:54PM
(#20690129)
Also cash can be made illegal.
Re:Interest Rates: Naturally Negative?
by rubbingalcohol on Tuesday August 13, 2019 @05:06PM
(#20690247)
Technically but likely not functionally.
True, but they can always impose greater restrictions such as how much you can spend with cash. Cash transaction limits have been decreasing for some time.
https://wolfstreet.com/2017/01/28/europe-limits-on-cash-tran...
Re:Interest Rates: Naturally Negative?
by samsonradu on Tuesday August 13, 2019 @04:59PM
(#20690182)
This, coupled with the pure speculation that before the bonds mature there will be a 'bigger investor' paying more (pushing the yield lower and the value higher).
I'm clearly no expert but banks seem to be able to do this somehow, no?
Banks are special because they can deposit money with the central bank. The central bank won't disappear, and like most money it's just numbers in a database (nothing "backing" them) so there's no risk associated with these deposits.
But in the EU, the deposit rate set by the ECB is -0.40%. So that would explain why EU banks would be willing to buy negative yielding bonds instead to hold in reserve, as long as the yields on those are less negative.
But then the yield on German bunds is actually even lower, hitting -0.60% recently, so it's not just that.
There are no effective ways besides these bonds to hold tens or hundreds of millions of dollars as cash, even if you hire a warehouse, security, and store pallets of fiat (which has been attempted). You are paying a premium for principal safety.
You either make this choice voluntarily as an asset manager, or because you are required by regulation or other means to hold a percentage of your portfolio in this asset class.