<story><title>Germany for First Time Sells 30-Year Bonds Offering Negative Yields</title><url>https://www.wsj.com/articles/germany-for-first-time-sells-30-year-bonds-offering-negative-yields-11566385847?mod=rsswn</url></story><parent_chain><item><author>logicallee</author><text>&amp;gt;- Many financial institutions are required to hold a certain percent of portfolio in safe assets. German bunds are among the safest in the world.&lt;p&gt;Can you explain how this can possibly beat cash?  If I say to you &amp;quot;I&amp;#x27;ll let you pay me ten cents to hold onto your $100 bill for a while, and give you a paper showing the obligation to repay your $100&amp;quot; (the meaning of a negative yield bond), how can the offer to let you pay ten cents to let me hold your $100 possibly be less risky than just holding the $100?&lt;p&gt;Why would a bond with a negative yield ever be a safer asset than just holding the cash?</text></item><item><author>apo</author><text>For those wondering why anyone would buy such a thing, consider:&lt;p&gt;- Many financial institutions are required to hold a certain percent of portfolio in safe assets. German bunds are among the safest in the world.&lt;p&gt;- A holder of a bond earns a capital gain (bond goes up in price) when interest rates fall. In that sense, zero is no limit at all because there can always be a buyer willing to accept an even lower (more negative) yield.&lt;p&gt;- Bond investors are well-aware of the two points above. When they sense that interest rates and&amp;#x2F;or inflation are headed lower, they know they can profit by buying, regardless of yield.&lt;p&gt;- Anticipated rate of inflation matters a lot because investors seeking return through yield focus on real interest rates (nominal rate - inflation). Inflation can be negative as well (deflation). If inflation is lower (more negative) than the bond&amp;#x27;s nominal return, that&amp;#x27;s a real &lt;i&gt;positive yield&lt;/i&gt;. And that positive yield is locked in for the term of the bond, which in the case of the story is 30 years.&lt;p&gt;- The European Central Bank has repeatedly signaled its belief that zero is no barrier and that negative yields will be tolerated indefinitely. The ECB stands ready for quantitative easing (QE), in which the central bank buys bonds with money it creates from thin air. Investors know this and this compounds the incentive to pile on and buy bonds to enjoy the capital gains (and real returns if the investor believes that deflation is inevitable).&lt;p&gt;It&amp;#x27;s likely that all these factors combine to create the current environment. How long all of this can continue is anybody&amp;#x27;s guess because the situation is without precedent.&lt;p&gt;It&amp;#x27;s as if the financial crisis of 2008 was never resolved - just papered over through massive central bank purchases of treasuries and stocks (Japan&amp;#x27;s central bank owns a major fraction of the value of the Japanese stock market at this point).</text></item></parent_chain><comment><author>toast0</author><text>Holding cash usually means putting it in a bank account. The banks are going to put a significant portion in their country&amp;#x27;s central bank; the European central bank and member central banks are currently charging banks to store money; at large balances, those banks will charge customers.&lt;p&gt;Now, you could put cash into a USD account at a US bank, where interest is still currently positive, but if you were storing Euros, you now have currency risk and jurisdiction risk. Negative rate German bonds have less risk than that.</text></comment>
<story><title>Germany for First Time Sells 30-Year Bonds Offering Negative Yields</title><url>https://www.wsj.com/articles/germany-for-first-time-sells-30-year-bonds-offering-negative-yields-11566385847?mod=rsswn</url></story><parent_chain><item><author>logicallee</author><text>&amp;gt;- Many financial institutions are required to hold a certain percent of portfolio in safe assets. German bunds are among the safest in the world.&lt;p&gt;Can you explain how this can possibly beat cash?  If I say to you &amp;quot;I&amp;#x27;ll let you pay me ten cents to hold onto your $100 bill for a while, and give you a paper showing the obligation to repay your $100&amp;quot; (the meaning of a negative yield bond), how can the offer to let you pay ten cents to let me hold your $100 possibly be less risky than just holding the $100?&lt;p&gt;Why would a bond with a negative yield ever be a safer asset than just holding the cash?</text></item><item><author>apo</author><text>For those wondering why anyone would buy such a thing, consider:&lt;p&gt;- Many financial institutions are required to hold a certain percent of portfolio in safe assets. German bunds are among the safest in the world.&lt;p&gt;- A holder of a bond earns a capital gain (bond goes up in price) when interest rates fall. In that sense, zero is no limit at all because there can always be a buyer willing to accept an even lower (more negative) yield.&lt;p&gt;- Bond investors are well-aware of the two points above. When they sense that interest rates and&amp;#x2F;or inflation are headed lower, they know they can profit by buying, regardless of yield.&lt;p&gt;- Anticipated rate of inflation matters a lot because investors seeking return through yield focus on real interest rates (nominal rate - inflation). Inflation can be negative as well (deflation). If inflation is lower (more negative) than the bond&amp;#x27;s nominal return, that&amp;#x27;s a real &lt;i&gt;positive yield&lt;/i&gt;. And that positive yield is locked in for the term of the bond, which in the case of the story is 30 years.&lt;p&gt;- The European Central Bank has repeatedly signaled its belief that zero is no barrier and that negative yields will be tolerated indefinitely. The ECB stands ready for quantitative easing (QE), in which the central bank buys bonds with money it creates from thin air. Investors know this and this compounds the incentive to pile on and buy bonds to enjoy the capital gains (and real returns if the investor believes that deflation is inevitable).&lt;p&gt;It&amp;#x27;s likely that all these factors combine to create the current environment. How long all of this can continue is anybody&amp;#x27;s guess because the situation is without precedent.&lt;p&gt;It&amp;#x27;s as if the financial crisis of 2008 was never resolved - just papered over through massive central bank purchases of treasuries and stocks (Japan&amp;#x27;s central bank owns a major fraction of the value of the Japanese stock market at this point).</text></item></parent_chain><comment><author>auntienomen</author><text>The world is different when you&amp;#x27;re dealing with really large amounts of cash.  You can&amp;#x27;t just store it yourself; your mattress isn&amp;#x27;t big enough.  And if you ask a bank to store it for you, the bank will charge you for the service.  (Banks that work in this line of business are known as &amp;#x27;custodian banks&amp;#x27;.)  Consequently, the effective interest rate on cash for large amounts of cash can be negative.</text></comment>