Would You Rather Have a Dollar Today or 89 Cents Ten Years from Now?

-edited

On August 16, the yield on the Swiss 10-year bond fell to -1.132%. Consider the implications.

Swiss Bond Yield Calculation

Calculation from numbers I plugged into MoneyChimp.

Someone "investing" in Swiss government bonds rates will get back about 89 cents, ten years from now, for every dollar invested today.

Logically Impossible

This is logically impossible, yet, it's happening.

There's far worse.

Price of Austria 100-Year Government Bond

The 100-year bond trades at 200% of par. You get half your money back if you live long enough.

Madness? You bet.

17 Trillion in Negative Yield Bonds

Bloomberg discusses Ways to Profit From $17 Trillion of Negative-Yielding Debt

The article mentions three ways to play.

  1. Carry and Roll
  2. Currency Hedging
  3. Playing the slope of the curve in one currency vs another

My suggestion: Don't.

The article did not mention risk. This is not "free money" as the article makes it appear.

The chart below shows one of the ways such schemes to pick up a few basis points can go hugely wrong in a hurry.

How Losses Can Build Quick

As a technical point, the loss would be +37.8% not -37.8%. The return would be -37.8%.

In addition to yields blowing up, currency moves can also get out of hand and hedges aren't perfect.

Some hedge funds are going to get burnt badly doing what the Bloomberg article suggests.

Currency Wars and Monetary Madness

17 trillion in negative-yield debt is proof of currency wars and monetary madness.

Globally, central banks want to cram more debt into a monetary system that is choking on debt.

Meaning of Zero

"Zero Has No Meaning" Says Greenspan: I Disagree, So Does Gold

Alan Greenspan is wrong. Zero is very meaningful with negative being even more meaningful.

Brick Wall

Negative yields mean central banks have hit a brick wall.

They cannot cram any more debt into the system. There is no tolerance for paying interest.

The evidence is overwhelming.

  1. More Currency Wars: Swiss Central Bank Poised to Cut Interest Rate to -1.0%
  2. Inverted Negative Yields in Germany and Negative Rate Mortgages.
  3. Fed Trapped in a Rate-Cutting Box: It's the Debt Stupid

Mike "Mish" Shedlock

Comments (36)
No. 1-20
john of sparta
john of sparta

well, what will 89 cents buy in 10 years? deflation has an upside. and that current dollar? after taxes, it was worth 55 cents. of course, in 10 years taxes might take most of that 89 cents.

tz3
tz3

Ask Ruth Baider Ginsburg. As Keynes observed, in the long run... When governent bonds go pets.com...

2banana
2banana

Or.. would you rather have gold?

Sechel
Sechel

I"m guessing individuals are not buying swiss bonds for buy and hold but that hedge funds and traders are on a short term basis hoping the bonds appreciate for them based on exchange rates or rates going even more negative. I can't imagine banks wanting to hold these bonds either unless they need to for regulatory capital reasons

shamrock
shamrock

"The 100-year bond trades at 200% of par. You get half your money back if you live long enough." That's not at all what that means. The original bond had a rate of 2.1%, meaning in 100 years you would have about $8 for every original $1 invested. Now you need to pay $2 to get that $8 in the end. The bond would have to soar to 800 before the yield was negative.

shamrock
shamrock

"As a technical point, the loss would be +37.8% not -37.8%. The return would be -37.8%." I'm not sure what you are trying to say, but Geofrey Blatt is likely correct. If the interest rate went back to where it was 30 days ago, the value of your bond would drop from 200 to 125, a 37.8% loss.

Greggg
Greggg

Hardly worth turning the crank on the money printing machine anymore, is it?

thimk
thimk

well you do get some interest on the nominal amount. in the case of austria 100 year -1% a year . a buck for every bond. but holding these and others to maturity may be problematic, bondaggedon . MIsh you will have to extend the timeline on your yield curve charts. who is the loser on the purchase ? in the case of austria pension funds:

dbannist
dbannist

Mish, I'm curious as to your take on how negative yielding bonds will affect government revenue in the future, especially Europe.

All those investors buying that stuff won't be paying on any gains, since there won't be any....for a long time. Unless they sell today.

Webej
Webej

The logic of time preference applies to whether you would rather forego present consumption for future gains. This makes sense to ordinary people who work for a living and have unmet needs which they might postpone.

But most of the big money is handled by people for whom this calculus doesn't apply. They either cannot consume the money (managers) or their consumption is only a marginal proportion of their income ("falling marginal propensity to consume"). Their only problem is how to turn their money into more money.

Since there seems to be only so much income to garner, the money can increase only by progressively stacking it up on top of a fixed "yield", which is the same as saying the interest is falling. For every halving of the interest, you can double the debt supported by said yield, asymptotically (in the theoretical sense) approaching infinity as interest approaches zero; the income supporting this debt pyramid illusion can be leveraged even more by extending maturities out further and further (heh, do we have a millenial bond yet?).

A shock to the amount of income supporting this pyramid could mean all assets emerge beyond the event horizon unencumbered.

lol
lol

We all know central banks are the only buyers directly or indirectly of neg bonds.....they're the biggest buyers of stocks,bonds,gold,silver,oil to prop it up.They have acre after acre of money trees (printing presses)and they're planting cultivating new trees every day!

ReadyKilowatt
ReadyKilowatt

Isn't this just part of the "everything bubble" that the FED started? Listened to a podcast yesterday where David Stockman basically said this is all due to speculation and flippers, and that seems to be a valid explanation. If you have no intention of holding the bond to maturity you really don't care about the yield, just that the greater sucker is looking to buy.

Memento mori
Memento mori

I like gold but is it really the safe asset we like to think it is? What are you going to do with your gold if the government makes its possession a capital offence? IRS managed to sent letters to cryptocurrency traders, imagine how easy it is for them to get a list of buyers from a bullion dealer. Then they buy it back from you at a price of their choosing or confiscate it if they want to. What are you going to do about it? There is no investment that is government proof out there, absolutely nothing. Maybe the best investment is to work towards having good and responsible government.

everything
everything

With the buying power of inflation, assume 2%, that's 20 cents

RonJ
RonJ

"Currency Wars and Monetary Madness"

Default by another name. None dare call it default.

"The 100-year bond trades at 200% of par. You get half your money back if you live long enough."

Last time around, Roosevelt confiscated gold, then devalued the dollar.

Carl_R
Carl_R

This is a great idea. Combine positive inflation with negative interest, to achieve stunningly negative real returns. Talk about a booming stock market, though: Since the appropriate PE is 1/(interest rate), the PE can go to infinity. Any positive return on stocks is better than a negative return holding cash, after all. Real estate prices can similarly go to infinity, for the same reason.

All this brings to mind the famous quote attributed to Jefferson, (but which he never said): "If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them, will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered."

While that quote is dead on, what with the massive inflation of the 70s and 80s, and now deflation, it is important to remember that “Famous dead people make excellent commentators on current events.” Ralph Keynes, 1992.

"The problem with quotes on the Internet is that it is hard to verify their authenticity." ~ Abraham Lincoln

Latkes
Latkes

The push for cashlessness makes sense now - every time you receive your salary, you will immediately start to lose it. Unless you spend it on stuff or go deeper in debt. Saving will be impossible.

themonosynaptic
themonosynaptic

Sorry - slightly off topic, but of interest. People who are into cryogenics are trying to determine how to invest their money for maybe centuries when they can be brought back to life. Current dollar bills may very well be invalid - so they are looking at other ways to invest.

There was an interesting podcast on this:

BTW, the Oddlots podcast is worth a listen beyond this episode.

Bam_Man
Bam_Man

Picking up pennies in front of a steamroller.