A lot of financial transactions and central clearinghouses require participants to post collateral. For example if an insurance company enters into an interest rate swap with a bank, both sides will have to post some percent of the contract's notional value in escrow. This protects both sides from counterparty risk (i.e. what if the insurance company goes out of business and can't pay its side of the swap).

The collateral needs to take the form of low-risk, liquid securities. Usually government bonds. Bringing a big bag full of cash to a derivatives exchange is not accepted. If you're a big financial institution, you have no choice but to buy government bonds. Even if they're negative yielding.

Since 2008, there's been a massive increase in financial regulations. Policy-makers have desperately pushed to make banks and other financial institutions less risky. That mostly means much higher capital requirements and more central clearing. In turn that means the demand for holding high-quality government has exploded.

There's no electronic cash account they can put up? If not, why not, and why can't we enable something like that so people aren't forced to buy bonds in order to hold cash?

It would be counter productive to society. Put money in a bank, the bank lends it out, the money serves society buy financing a new business or perhaps consumption but either way it is doing something. Lend it to the government in the form of bonds and they'll spend it on something.

If it just goes into the cash account you're describing, it does nothing but exist, in the event of recessions this would be severely dangerous to a countries financial system because it would be the safest place to store your money, safer even than bonds, so at the exact time when the economy needs cheap credit, interest rates would rise as money drains into these electronic cash accounts.

That makes sense but I have a follow up question. What forces this? For example, what's to stop a single entity from reaping the rewards of using cash while everyone else buys bonds to keep the economy moving. Is it a government regulation? an agreement between large institutions? or are the gains to each individual entity large enough that the negative yield is worth it?

Cash or a bank demand account is not without their own inherent risks. A fire, robbery, or forced currency exchange could destroy the value of the physical commodity of cash, and the FDIC only insures individual account bank deposits up to a certain limit so a bank institution failure could cause losses to individual accounts.

Ok you're arguing that there is no such thing as a liquid store of value that that offers a better return than a negative yield government bond?

So let's say I'm a bank with a stack of 1B in high denomination central bank notes. I calculate the rate of return as zero minus the annual cost of securing those and the annual risk that they are stolen or destroyed. Inflation isn't a factor because the bond is in the same currency. Based on your explanation that rate of return will be lower than the -0.11% that I would get from a german 30 year bond today. And there's simply nothing I can exchange those central bank notes for that would do any better than the bond.

Like OP I've never understood negative yield debt and I'm trying really hard to.

Arguably, the combined cost and risk of loss when you store a pile of cash in a secured cellar is greater than 11bp.

There's also the fact that bonds can appreciate, so even if on the face of it you're taking an 11bp hit that might not be true in practice.

Not counter productive to the society: as money have nothing behind and central banks can just print it, they can print or electronically grant any amount to anyone needing it. This would not affect the trust in the value of the money because there is no such value. What is $1 or 1 Euro backed by? An ounce of Moon dust?

The fundamental demand for dollars and euros is caused by the fact that every April, you need to have a bunch of them. And if you don't, eventually men with guns will take you to jail.

It is different here, you don't pay the taxes yourself, they are subtracted from your salary by the employer and paid on your behalf. it is not a service you receive, the state does not trust you will pay. When you leave half of the salary on the pay day and then pay another 20% taxes on anything you buy, not many people would pay something in April, even with the men with guns threat.

It’s a funny system where citizens aren’t trusted but corporations are.

In the US, the government also withholds taxes from your paycheck, and in other circumstances.

This is sort of correct, but it also doesn't address the point that this setup can't exist, logically, with fiat currency.

There is no way to hold money that isn't ultimately lent to or borrowed from some other entity. You can store cash under your mattress, but even that's money that you've effectively lent to the government (the seigniorage of storing it under your mattress means that you've now given them the ability to print that same amount of money at zero extra cost).

This is harder to wrap your head around, but once you understand the principle - money is always at work, no matter what form it's in - it's a lot easier to understand the flow of money on a macro or international scale.

> This is sort of correct, but it also doesn't address the point that this setup can't exist, logically, with fiat currency.

Yes, it can. It can't exist with the game playing that exists with most modern fiat currencies to create the illusion that they are something other than fiat of the issuing government, which creates a lot of artificial debt to create the illusion of a government constrained by the same fiscal concerns that apply to a country using commodity or foreign fiat currency rather than its own fiat.

But this is a behavioral hack to reduce the likelihood of a particular undesirable course of monetary policy (unrestrained money printing), not fundamental to the nature of fiat currency.

So people should be forced to invest their money even if they don't think any of the ventures are worthwhile? And physical cash shouldn't exist either?

If you describe negative interest rates as "forcing people to invest their money", how would you describe deflation?

Money is debt. You hold something now and expect somebody else to give you something of value for it in the future. But the future is always uncertain. You may lose out on the deal by holding on to your money. But you seem to be demanding that somebody somehow should guarantee that people never do lose by holding on, no matter what. Who would that somebody be? How could that even work?

Money was debt. It's how it got invented after all.

It's not so clear cut anymore. Most currencies aren't backed by anything anymore nor are they tied to any yearly returns. They've become arbitrary numbers manipulated by central banks to control the economy.

You would have to back the money with something physical such as the Gold Standard. An Oz of gold today will still be an Oz of gold tomorrow. Furthermore, the rarity of gold makes the amount in circulation relatively constant.

The problem is that the purchasing power of gold isn't relatively constant: what you can buy with 1 oz. today and what you can buy with 1 oz. tomorrow are not necessarily the same — so you have much the same problem.

Moreover, the relative constancy of the gold supply is a problem, because as the economy grows that makes each unit of gold more valuable … which leads to deflation, which is far worse than inflation, and can lead to utter economic desolation.

I hate fiat money, I really do: I hate that governments can inflate their way out of debts and inflate away my savings. But gold — appealing as it is — is even worse.

1 oz. of gold doesn't change from day to day, rather, only people's opinion of it changes. In that sense, is there anything you can think of that people would want as much or more in the future than they do today? I can think of maybe 1 thing, sex, but I don't even want to begin to imagine how a system like that would work haha.

Ultimately I agree that fiat currency is a necessary evil because of the ability to expand with the economy.

Gold is essentially the same plus liquidity trap (think of Bitcoin and it's deflationary nature)

> So people should be forced to invest their money even if they don't think any of the ventures are worthwhile? And physical cash shouldn't exist either?

Physical cash is also debt (backed by the full faith and credit of the US government, in the case of the US, or the relevant issuer in the case of other fiat currencies).

Non-central fallacy: Yes, it technically meets one definition of "liability", and is therefore debt; it is not "being invested in a venture" in the sense of this discussion.

> Non-central fallacy: Yes, it technically meets one definition of "liability", and is therefore debt; it is not "being invested in a venture" in the sense of this discussion.

Except it is being invested. That's a major part of the role that the government plays when interacting with the macroeconomy.

Then let me try phrasing it a third way:

So people should be forced to invest their money beyond the extent to which holding that money inherently counts as an investment, even if they don't think any of the ventures that they directly invest in are worthwhile?

The fact that government "is debt backed by full faith and credit etc etc etc" does not answer the substance of the question I was actually asking, and which should have been clear from the context I was asking.

Your job as part of social contract of living in a market-based economy is to allocate capital in the most productive way possible to maximize efficiency of the whole. What this means, is that if you believe no ventures are valuable, you allocate your capital in cash. If you believe ventures will outperform cash, you invest in ventures. So you're "forced" in the same way you're "forced" not to be homeless, have a job, and not hit people. It's a way of life.

Physical cash should exist.

But your first question is much more interesting in what it seems to imply.

If i understand it correctly, the converse would be: entities are free to not invest their money when there are no worthwhile ventures.

This sounds all well and good on an individual level. But by what logic or mechanism can the ~200 countries that exist have the ability to 'hold' money and not 'invest' it?

Of course physical cash should exist. There just isn't enough of it and it isn't practical for large investors.

Deposit guarantee in Germany is only like 100k Euro. This is for institutions buying tens or hundreds of millions of Euro.

People can hold cash in bank accounts but they also yield negative interest rates (for balances above some threshold).

An account that large would require insurance, management and security/auditing. Stuff you don't need with bonds since the government provides those.

I'm sure if government bonds were negative for a long enough time an alternative product would appear.

Actually cash is a form of that: a $100 bill is a bank note that you have $100 in the bank. In theory if you want to deposit $1 million, the bank should just give you a note for a $1 million deposit - that would be a $1 million bank note. But all this was true when the bank note was for the gold or silver that was deposited in the bank. Now every bank note is just a paper about an amount of nothingness :)

Some people have asked, if US banks pay a minute amount of interest in savings, and the Fed pays like 2% or more on deposits by banks, why can't someone just start a bank that stores deposits at the Fed and passes through the interest?

And the answer appears to be, because the Fed won't let them, because they are afraid it could undermine the regular banks.

Why would a derivatives exchange not accept cash? what are people buying those derivatives with?

Furthermore, how could any bond (or anything at all for that matter) be less risky than cash? the market value of a bond may change over time but $1 will always be worth $1. Inflation may change the purchasing power of that dollar but then the exact same mechanism will effect the bonds as well.

Cash has risks:

* risk of physical destruction

* risk of physical theft

* risk of forgery

etc etc

There's some nonzero cost to accept, handle, vet, store, etc for cash. That's not even including if there are extra reporting laws or other for large amounts of cash, which just adds to the overhead.

These are all concerns with paper, not “cash” as it’s commonly considered in finance.

Have $xx,xxx in a checking account at a national bank. It’s a database entry, not a pallet of pennies. Furthermore, with fractional reserve banking, I sincerely doubt if there’s enough coins and bills in the country to account for the total “cash” in all the accounts, let alone all the assets.

Similarly, everyone involved in these transactions have access to the same banking system. There’s no reason you need to fly a C-5 with pallets of Swiss francs around. (Even then, it seemed absurd since both governments could access Swiss banks.)

> Have $xx,xxx in a checking account at a national bank

At the scales of financial infrastructure, bank deposits are not cash. They are debt issued by banks. The point of collateral is to give a bank’s word weight.

Or, based on what I read in financial statements, "cash" and "short term securities" kind of blur together.

Cash is more of a general category of things that are suitable to use for similar purposes, than one specific thing.

Sure but then you just introduced a completely different type of risk, which is the collapse of that bank.

Bank collapse is pretty rare. Even accounting for 2008, there’s now a de facto government insurance plan for banks. i.e. Too big to fail.

Banks collapse often in the US. There have been 63 since 2008 with over a billion in assets.

28 since 2010.

In germany unless you're with DBAG it's not clear the government would step in and save you.

8 US banks collapsed in 2017, as another example.

Wikipedia has a list of the specific banks, and most of the recent ones have been quite small.

e.g. The Farmers and Merchants State Bank of Argonia with about $34M in assets.

The FDIC has stepped in as expected with all of these, I believe.

Yes, but the FDIC equivalent in Germany is 100k, which doesn't help you if you're in the business of buying 30 year bonds (usually that's institution buying >10MM)

No one buys a 10 million dollar, 30 year bond from a bank with 34 million in assets.

It’s disingenuous to claim that all banks are equal in terms of capabilities, assets, or risk.

Agreed, but you certainly do it from a bank in Germany that isn't dbag. And if you're not dbag it's not such a sure thing that the government will come and save you.

Or say in the US, you'd buy that from US Bank, which isn't in the big 4 consumer, or top few commercial, and it could be let to fail.

It's still safer than a tiny bank, but it's not as safe as government bonds.

That's all it really boils down to - you pay a bit extra to get more safety.

You may be comfortable depositing $10MM in a US Bank reg D account, but I would not be.

Well actually for US Bank specifically I might because I know their business model is incredibly conservative. But replace that with another large but not big4 bank.

and this is exactly why there is a market for negative yield bonds.

The true decision point isn't 0%. It's the rate for the risk/cost of holding cash.

BTW has there been any research toward what this rate actually is?

I think the answer to both your questions is because there are costs to securely storing cash. That also makes cash risky compared to bonds, where you are not responsible for the security.

Why is everyone responding to the question under the same misinterpretation, that it means "cash" as in "physical banknotes" rather than "electronic Euros"? I know the principle of charity is hard sometimes, but come on.

Why would you expect that a bank would hold your electronic euros for less money than a negative yield bond would cost?

Because a bank can go under, and you can lose your money in excess of the insured amount.

Not if it's a bank that specifically caters to this crowd and doesn't take any of the normal risks associated with lending.

They would have two options:

A) keep the euro notes in their vault, which only works if you deposit paper bills in the first place

B) keep electronic deposits in the ECB and pay interests to do so

In either case if they give back the money to the clients when they ask for it how do you expect them to cover their operating costs (plus the interest they are charged by the central bank in case b)?

You mean like... a German bank? They will happily do what you ask. For a small fee. In the form of a negative interest rate.

And your deposit won't be insured past like 100k euro.

This imaginary bank would still have costs. What would be their income?

Excellent question. There is a company, The Narrow Bank, that has the same idea, but they didn’t get a banking license from the Fed. Matt Levine, whose newsletter you should clearly start reading, has the details: https://www.bloomberg.com/opinion/articles/2018-09-06/fed-re...

This is the first responsive answer I've gotten to that question.

Probably because the alternative interpretation makes the answer so trivial that it's not worth assuming?

A large amount of cash is expensive to store safely (fire) and securely (theft).

Not only - AFAIR the Colombian Steve Jobs had problems with humidity too - 2.1 billion 80s' USD lost to flooding and rotting is what I would call real liquidity :D And also rats I think.

It’s extremely insulting to refer to Escobar as the Colombian Steve Jobs, if that is the connection you are making.

Escobar conservatively killed thousands of people. I wouldn't worry too much about insulting him.

It’s insulting to Colombians.

Maybe it's insulting to Steve Jobs.

It's funny though.

In cas that's not obvious I just want to add that the collateral allows you to only keep a fraction of what you're investing in actual collateral. The exact numbers depend on context, but imagine you buy/hold collateral and for that can loan/borrow five or ten or twenty times as much.

This is an example of how to write a good article, I think the first sentence answers your question: "Germany sold 30-year debt at a negative yield for the first time, as investors desperate for safe assets bet that further falls in yields will boost the value of the bonds in the future."

The investors buying these bonds are simply betting that these bonds will increase in value (which will supposedly happen if central banks cut interest rates more in the future).

These bonds don't pay out for 30 years and I bet few if any of the institutions buy them intend to hold them that long, they plan to sell when the value of the bonds rise.

So why not just park that money in cash? Well let's say you have $1M and you think bond yields will continue to fall. If bond yields fall further, then the value of these bonds increase, then you can sell them and realize a return.

However, you also want to think about any way that your cash holdings could increase. Could a dollar (or euro, or whatever currency) tomorrow be worth more than a dollar today? Yes, if there's deflation then it could make sense to just hoard cash under your mattress and realize that it's purchasing power is growing!

But these investors are assuming deflation is not too much of a risk - they believe central banks will act to quickly slash interest rates - both increasing the value of these bonds and decreasing the risk of deflation.

Markets are pricing in future interest rate cuts, which is probably not a bad bet to make. Markets a probably predicting interest rate cuts because they think various economies are weakening and central banks will cut rates.

The implication then is that we're in a bond bubble. When you're buying something that you know has negative fundamental returns on the assumption that someone will buy it from you at a higher price, that's the definition of a bubble.

And like many bubbles, it's entirely possible they'll be right in the short term, but it's basically guaranteed that they'll be wrong in the long term. You know exactly what a bond will be worth in 30 years, and with negative interest rates, you know it'll be worth less than now.

Expecting the price of something to rise in the future is not the definition of a bubble.

When people were selling houses in Detroit at the bottom of the housing crisis for $1000, the people buying them were expecting the value to rise in the future.

It's almost like profiting off of fear not greed.

Expecting the price to rise when you know the underlying fundamentals don't support that price is the definition of a bubble.

People buying houses in Detroit have an investment thesis that there will still be people living in Detroit and they will still need houses, and even more broadly, that there will be more people needing more houses than there were at the bottom of the housing crisis. They may be right or wrong, but there's still a thesis based on fundamentals.

People buying unbuilt houses in the middle of the Everglades [1] because they heard of prices doubling or tripling within a year is speculation, and many of those areas still have not regained the value that investors paid for them, almost 100 years later, and probably never will.

[1] http://www.thebubblebubble.com/florida-property-bubble/

The bond market, where trillions are traded by sophisticated investors, is by definition efficient.

If the price of something is higher than the "fundamentals support", that price will adjust because there are literally billions being traded every hour.

You could say that the price of land in the Everglades is set because of unsophisticated investors, with relatively little money at stake. They can't be compared.

That's not what's happening with bonds. The underlying fundamentals do support a higher price if interest rates go down. The price would then stay there until interest rates rise. In all of these cases the market price is fully rational and fully supported.

GP didn't say that a bubble is expecting the price of something to rise, they said that a bubble is expecting the price of something with negative fundamental returns to rise.

> which will supposedly happen if central banks cut interest rates more in the future).

long bonds aren't affected by overnight rates. that's why the yield curve inverts

Individual investors would probably not buy these. It's a lot harder to keep $100m under the proverbial mattress: not FDIC-insurable, literal cash requires guards, etc. And anything else you buy to store the value (gold for instance) has higher volatility and risk than these negative-interest bonds. So the theory would go, anyway.

Individual investors still can buy. For example, if I am sitting on too many dollars and expect that Euro will be significantly stronger than dollar in 30 years, I can diversify a little bit. Same applies to other currencies.

If it's a large amount of money, you might decide to put it in a bank so that you don't have to worry about it being stolen.

Once it is in a bank now you have to play the game of trying to figure out the comparative risk between the bank not being around any more 30 years from now, versus the chance that the German government will have forgotten how to operate the money printing presses.

Of course, since this is the EU, I'd actually be rather worried about the latter. Unlike sovereign currency countries, EU countries do not just get to print Euros. A lot can happen in 30 years, especially to a country with 1.5 births per woman like Germany.

Do any of the people downvoting recall what happened recently to all those Greek Euro-denominated government bonds?

Of course, that could never ever ever happen in Germany? Not even in 30 years? Let's hear an explanation.

> Of course, that could never ever ever happen in Germany? Not even in 30 years? Let's hear an explanation.

well anything can happen. I mean I live in germany and I can totally see that happen. our biggest industry needs a lot of breaking changes or else they will fail pretty hard. and they have less than 30 years to do so

It could, but there still isn’t anything safer than German bonds.

Yeah I don't get the impression that you know too well what you are talking about if you don't know the difference between the EU and the Eurozone. Even if the euro were to break up/be abolished and resolve back to smaller currencies there would be a conversion key. The chance that the renmenbi, GBP, yen or even the dollar will have major issues look a lot more likely in the current climate - the renmenbi is still struggling to become a global currency and everyone can see the political struggles on the horizon, the GBP will continue it's free fall after the disastrous Brexit and the following depression, the dollar is widely overdue for a correction and will lose out if eg China starts dumping their reserves, not to speak of the endless debt spiral the us is in - similarly for the yen, with the high debt it looks unlikely to be a stable currency in the long term (even if it's mostly local debt). That doesn't leave too many options - with the euro a fairly stable option as long as people remember the nightmares of Europe pre-euro (and most outside the anglophone bubble do): huge costs and price uncertainty in cross border trade, big financial players gambling and manipulating against smaller currencies (as you still see in Africa today), and overall little trust in the local currencies.

Trust in the euro (not necessarily the EU as a whole, as it is a target for much local political hate & lies when it's easier to blame Brussels than accept responsibility for mistakes) is at an all-time high, with not even Italians wanting to give it up. No one wants the lira or drachma back.

Eurozone is a horrible term to use here, as some nations are pegged to the Euro or have adopted it with no issuing rights or have promised to adopt it. We are talking about specifically about EU governments with partial issuing rights that sell Euro-denominated debt. Like Germany.

One risk (of many different kinds of financial risk) with buying debt denominated in Euros from EU governments is that if such a nation is economically worse off than the others nations that also have Euro issuing rights at the time of bond maturity, then the chance of default goes up substantially. As happened quite recently with Greece.

This is not a type of risk faced with nations with their own sovereign currencies. Default is still possible, but devaluation is a safety valve.

If you take out a bunch of cash you have to store it. If you move it to an international market you suffer currency risk. If you think that the Euro is going to go up like crazy (if you forecast deflation) and you also think that every other European government has a pretty bad default risk, then you'll happily accept negative yields. Don't forget that it costs money to guard a warehouse full of cash.

This means that lending money to the German federal government is considered less risky than just “holding onto your money”. You might think of money as a physical asset (cash), but really it’s far more varied, and for amounts that exceed insured deposit thresholds, you are not protected by the risk of failure (or “bail-in”) of a banking institution. Besides, as others have pointed out, these make little sense from the point of view of an individual investor and are going to be parts of more integrated risk-calibrated portfolios of assets.

I think with quantitive easing this analogy isn’t really true anymore: there is a guaranteed buyer (the ECB) propping up the price of German sovereign debt, so making the yields artificially low.

I’ll definitely grant you that quantitative easing complicates the picture, but i it does so in ways far more complicated than you describe: firstly, the ECB buys at secondary-market prices, so the “flight to quality” effect is still there, albeit perhaps in muted form; furthermore, keep in mind that the ECB can and probably will resell those bonds that it does purchase at a later date when it will want to wind down it’s balance-sheet. Other effects also apply. Negative yields however probably do represent a true aversion to risk on behalf of investors, in some capacity or another.

Your confusion comes from focusing too much on what happens at maturity.

This is the least important thing here.

Bonds have two ways of providing a return. The yield, and the price of the bond itself.

Lower yield means greater price of the bond. They are always inversely correlated.

Even lower yield means even greater price of the bond.

Because of worldwide policies, Its a bond bull market. The greatest bond bull market of all time and there is no exit.

Government creates new bonds at market price. Their independent Central Bank buys those bonds at market price giving newly created money to the government or traders. Market price is always a premium to the prior price. This action devalues the currency, otherwise known as causes inflation, otherwise known as people’s share in the currency stock is diluted.

So nobody needs to care about the yield. Nobody is thinking “well golly I’m going to use a few fractions of a dollar for the next 30 years” theyre thinking bonds to the fckin moon

Buy high sell higher directly to the central bank.

Benign attempts at economic stimulus have turned into a full blown currency war between monetary unions and nation states. The whole point is to get people to think “hm maybe my money isnt doing so well in a bank or in my mattress, maybe I should circulate it in risky investments” , and since people are so willing to pay for the privilege not to do that, the yields will go deeper negative. This prompts other monetary unions to cry foul and consider these actions unfair and uncompetitive, and so they do the same thing to devalue their currency to compete.

Any time you hear someone talk about responding to currency manipulators or reacting to the trade war by lowering rates or devaluing their own currency, just remember:

Bond. Bull. Market.

Currency is mildly decoupled from purchasing power.

Here's how you look at it. You give me $20K today, and I promise to give you $19K back in 30 years. The question is two-fold.

(1) What else would you do with that money, that would offer you a better return, factoring all externalities. Holding cash isn't free once you account for risks like getting robbed holding bills your house burns down, you get fake bills, and potentially-negative interest rates at a bank. If you see the market going down you're not going to put it there either.

(2) How much will $20K today dollars buy you as compared to $19K future dollars? If you're betting on deflation, then that $19K future dollars may buy you a house where $20K today dollars may buy you a car.

(3) what will the best offer to hold $20K be tomorrow? If it's even worse, I can sell my $19K promise and make a profit! (Falling yields means raising prices.)

There are dozens of answers here that explain why institutions buy sovereign debt, in general.

What those comments don't explain is why anyone would buy this particular sovereign debt.

So: why would anyone buy negative-interest-rate German bonds when U.S. Treasury bonds still have positive interest rates, and are available in much higher volumes?

Because those positive yields are only available if you don't hedge your FX risk. Most institutional investors have a mandate to hedge FX risk and this will take UST returns for EUR investors negative.

Because you’re a European and have to pay your taxes (or your investors, or other people) in euros, so don’t want any exposure to the Euro/Dollar exchange rate.

Yes. The difference in interest rates implies that the EURUSD exchange rate is expected to rise (slowly) in the coming decades.

Diversification. Spreading your money across many governments which are unlikely to default is better than putting it all in one.

With diversification you decrease the risk of losing everything and increase the risk of losing something.

I think there are laws stating that certain kinds of German institutions must buy German bonds, but I'm not sure.

Certain investment funds and pension funds have mandates that require them to buy investment grade or sovereign debt

It's quite terrifying to think that pension funds are using forecasts of healthy returns to claim they are well funded, whilst simultaneously making investments with guaranteed negative returns.

There's nothing particularly terrifying about "negative". What's terrifying is the delta between forecasts and actual returns.

Forecasting 8% vs actual 2% is much more terrifying that forecasting 1% vs actual -1%.

If it makes you feel any better, central banks don't either.

Your question is actually fairly straightforward: people own these bonds because they have to. Most countries have regulations that force institutions to own these securities.

The more important question is actually: if you are a bank, what do you do now? You have to pay to lend money to people, it costs you 1%/year to just keep the lights on.

In Japan, most banks are (again) effectively insolvent. Germany is moving that way...and yes, the "point" of this action (according to central bankers) was to support banks...but it will likely end in most banks in affected countries going out of business.

...but don't worry, the central bankers will produce a brand new plan compose of intricate theories that clearly show how intelligent they are and how this totally wasn't their fault.

If you put a lot of money in a bank then there is a counterparty risk the bank defaulting or you getting a haircut. Money in a bank is no longer "yours".

Some hardcore asset management schemes store physical US bills in a high security storage. You will pay % negative yield on yearly storage cost, but cash is truly yours and you can withdraw any day.

Also in the EU, with some fintech startups, you can now open a bank account which comes with a IBAN number from a central bank of Lithuania - essentially your money is stored within European Central Bank system. You will have negative ECB interest and pay some extra, but there is no counterparty risk unless the whole European banking system collapses.

It should be noted that "a lot of money" in this context means more than whatever limit your country has on deposit insurance. In the US, up to $250k is insured by the government against default, and it goes per account type and per bank, so you could easily store, say, $2M fully insured.

But of course, this does not insure you against systemic risks. When the financial system in Iceland broke down, depositor insurance meant nothing.

Another popular way of storing large amounts of money over long time, is to invest in real estate. Buy apartments in central Paris, London, New York. Very small risk that you lose anything, especially in real terms, if you can keep a cool head about when to sell. Downside is that these are not liquid assets.

One way to make money is if you sell the bond at a higher price later to another buyer. From the article:

“Why are people buying at negative yields? It is mainly in expectation that you’re going to be able to sell to someone at a higher price later on,” said Andrea Iannelli, investment director, fixed income at Fidelity International. “Whatever the yield you have to assume you’re going to make more on the capital gain than lose on the yield.”

So Y < X, but if you bet you can sell at price Z to another buyer later, Z > X and you profit.

As an analogy I just thought up: it's kind of like overpaying for a house, thinking that in time the house value will appreciate.

Or just paying for a house, thinking it will appreciate. (The "yield" of a house is negative, because it costs money to keep the thing in the same condition you bought it in, as anyone who owns a house knows.)

Suppose you had half a billion dollars or whatever. You could get it in cash. You can't put that under a pillow. You'd need a really secure vault to guard this cash against theft and accidental destruction (fire, flood). In the best case, nothing happens to the money, so it retains its full numeric value, but that vault costs money to rent and operate, and those costs add up to negative yield. That effective negative yield of the vault could be more negative than the negative bond, making the bond more attractive. The negative bond could be more attractive even if it costs more than the vault, because of lower risk.

How then a bond is different? It is also either a physical thing or a record in DB; both cases require protection and security.

A bond is a registered contract that names specific parties, whereas cash is a manifestation of value associated with whoever bears it. (There are bonds like that; bearer bonds.)

Stealing bonds would have to be an information crime; surreptitiously rewriting the identity of the investor on all copies of the contract in existence. Or something like that.

It's cheaper than a bank vault and more secure than a home safe. I can't think of any other reason to buy them, though.

Can't banks just deposit the money as reserves with the ECB and earn zero? I suppose in the 30 year case maybe you're assuming that the ECB won't pay zero on reserves in the future, but how does that explain the short term rates?

The ECB charges for deposits as well. The deposit rate is -0.4%

https://www.ecb.europa.eu/stats/policy_and_exchange_rates/ke...

The ECB deposit rate has been negative since 2014. The role of central banks during slow growth is to coax banks to lend, not to hoard cash. When growth is high they increase deposit rates to take money out of circulation.

Can they?

Most 'central banks' dont really offer banking services. Eg: you can't deposit to the federal reserve.

So the question is what to do with your money, that is both (a) easily transferable (b) auditable (c) safe

Government bonds are the traditional answers to these. They offer all of a,b,c. And until now they even offered extra money, aka interest, as bonus.

I think the best way to understand bonds is the old fashioned paper bonds. There was 2 parts: a primary part representing the money down, and a detachable 'coupon', say 5 of them for yearly interest for five years. So every year you'd bring the appropriate coupon in and get your interest. At the end, you'd get your money back which is represented by the main bond. Or more likely trade it for another bond.

All this means is the coupons now represent how much you have to PAY the government for issuing the bond. So it's more like a maintenance fee, rather than 'interest'. Or another analogy, safe deposit box fee. Bank account fees. Etc.

Money in the mattress, in physical vaults, safe deposit boxes all have the following property: (a) difficult to value (gotta count all those bills! who's doing the counting? is it auditable? did any 'shrink' somehow?) (b) costs quite a bit of money to just store ($100m is a lot of bills! it weighs a lot! it can get set on fire!) (c) not so easy to transfer.

As a result of all of the above, it's unlikely to be usable as collateral. Since the primary target is banks, they need 'liquid' assets that they can present to their auditors to prove they have reserves for their deposits.

I wasn't aware that ECB reserves had a negative rate. To your point though, if you're a bank and a member of the Federal Reserve System, you definitely can deposit to the Federal Reserve. Banks have a reserve requirement as you mentioned, and in my understanding, that must either be in cash in the vault or deposits with the Fed. I believe the ECB operates with similar rules.

The ECB’s rates are short-term; who’s to say that they won’t turn acutely negative for at least some proportion of the next three decades? These rates are “locked-in”, provided you hold the bond to maturity (and might have an upside later on).

A majority of institutional investors have investment mandates which limit them in the amount of cash they can hold. Additionally, if you think there's no chance of EU inflation going forward, even if these are negative yielding securities, you will still have a price return on these.

30yr Bunds were yielding 0.875% at the beginning of the year and have recently gone negative. If you were benchmarked against them and at the beginning of the year decided to either move to cash or short them, you more than likely lost your job.

A negative rate bond or CD is not fundamentally different from a normal one, you pay a set amount now and in the future you get a guaranteed payout at a future date. Except that instead of making money on the interest, you pay a little. The banks offer these products because they still make money on the fees, and on the arbitrage from loaning out the invested funds at a higher rate(or by doing nothing with a negative rate), or by bundling and selling the securities. This can still be a good option for buyers compared to investing in junk bonds or CDs that pay higher rates, or in stocks and mutual funds because what is important is the risk adjusted return and not just the yield. There are costs/risks associated with keeping a pile of cash in a vault or stuffed in a mattress, or sitting in another type of account that is not insured. If you expect interest rates to decrease even more buying a bond or CD can make money because you can sell it for more in the future, even with a negative rate. The big one is that in certain cases there are requirements to purchase CDs or treasury bonds by law, or as part of a contract, or by the governing docs of a company instead of just holding "cash".

For an individual, you would be unlikely to purchase these because the cost/risk of holding cash in a bank account is minimal and some type of insurance likely covers it, and most individuals want higher returns and would rather invest in index or mutual funds than CDs even if they had positive returns. And if you think that interest rates will drop in the future and you can sell the bond for more, you are still more likely to buy higher yield bonds with higher risk.

> I still don't understand negative yields

Safe assets sell a service: they’re a safe place to put your money. For this service, you pay a fee. There are other places to put your money, from cash to money market accounts to listed equities, but they aren’t safe. (They compensate for this unsafeness by promising you a return.)

Why not just putting aside that cash pile? I don't get why you want to exchange it with securities and pay negative yields.

This will make better sense if you treat money as a trading product with supply and demand.

Negative yield on an investment means the banks and investors believe the amount of money will shrink in 30 years due to less demand in the future or too much supply right now. They further believe that the yield while negative is still better than the amount of money shrinkage down the line. Thus a negative yield investment is still a sound investment.

If you have several million Euros to invest in fixed income securities, that would be a very large mattress. Even if you deposit it in a bank, what do they do with the money if yields are negative? Charge rent for the space, I guess.

It could get stolen from under your mattress. Bugs could eat it. It could catch on fire.

You would buy one of these negative bonds as a safer alternative to the risks above.

This product may not be for you, but someone would be willing to make this trade.

> I could just hold on to my money, "keep it under my mattress" and still make a better ROI than bonds with negative yields. Why would anybody buy these bonds?

You think you would do that for millions and billions?

Well, bonds are easier to deal with than cash AND you do not run the risk of binge-spending them.

In some sense, bonds “do not burn” whereas your house may, or tour bank account may collapse, etc.

The premium is the guarantee.

Held individually the negative-yield bonds don't make much sense. However, they can actually improve the risk-adjusted returns of a portfolio that also holds stocks. This is because long-term bonds have, in the past decade, been negatively correlated with stocks [1,2].

[1] https://imgur.com/a/r9nCsN5

[2] https://www.portfoliovisualizer.com/asset-correlations?s=y&s...

Because the interest rate will soon be less than the bonds. Negative interest rates coming down the pipe globally. Only way that I can see it getting justified.

The writing has been on the horizon for a while already [0]

[0] https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2283~2ccc0749...

Not sure why this is downvoted but there's possible truth to this.

In addition, these bonds could in fact make you a lot of money in the short term if the interest rate for these bonds continue to get more negative.

> Because the interest rate will soon be less than the bonds

What interest rate are you talking about? The interest rate for all the other maturities was already negative.

Could you though? Inflationary and deflationary forces are constantly at work modifying the value of the money you have under your mattress.

putting cash under your mattress has security costs. For < 1k euro, probably not worth calculating. But for > 1M euro, there is a real security cost to keeping that amount of cash safe for 30 years.

I may be totally wrong, but I think the floor on negative yields is going to be the security costs of keeping cash for that timeframe.

The only reason I can think of is to mitigate the downside risk of financial collapse. These are banks buying these bonds. Banks which might be worried that short term financial pressures might tempt the governments might to reach for their cash positions. I would rather hold some negative-yield bonds instead of cash in that scenario.

Why would said government not reach for the bounds or just not buy them back if they issued them?

From what I understand it’s moreso for institutional investors that have lots of capital they need to park somewhere. Making the bet that the gov will be around longer the bank

But for retail investors who can store their money in a FDIC insured savings account it’s not clear why they would buy negative yield bonds.

So for an institutional investor, a negative yield bond is essentially a hedge against bank failure?

Also, look at it this way, if you have, let's say $5b on deposit at a bank, and you need to give it to someone else for some reason. Well transferring that money could destabilize the bank. They might refuse to let you withdraw it quickly. etc.

Bonds are easily and instantly transferable privately without causing major market loss.

This is the thing about huge finance like this, there's a gravity to money, and your intuitions from having bank accounts, money, etc, doesn't apply because entirely new problem appear you will never have. What if every time you paid a major bill at your credit union you threatened the solvency of that institution?

Yea that’s a good way to think about it

Does that mean a negative yield indicates a loss of trust in banks? That institutional investors are so desperate to avoid relying on banks that they're willing to take a loss on gov't bonds?

No, institutional investors never put vast sums of money in banks, regardless of the yield.

I'm also curious about this. Does it mean that people are betting that $Y will be more valuable than future cash equivalent of $X due to inflation?

No. Bonds are based on their money amount. So as money loses value due to inflation then so does the bond.

If you want to hedge against inflation you would need to invest in something that either yields a positive return or something whose value isn't tied directly into a money amount, like land.

You can probably write off the losses on your tax filings also. That may play into it.

> I feel like I still don't understand negative yields, despite really trying to.

There isn't anything to understand. It's banking lunacy.

You only put money into negative yields if you are forced to do it.