Author Topic: Negative interest rates take investors into surreal territory  (Read 23419 times)

RuleNumberOne

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Re: Negative interest rates take investors into surreal territory
« Reply #70 on: July 14, 2019, 11:05:31 PM »
This is the Second Tulip Bubble. Investors trading paper at higher and higher prices.

https://www.wsj.com/articles/oxymoron-alert-some-high-yield-bonds-go-negative-11563096601?mod=hp_listb_pos3
"“And just because something is negative yielding, that doesn’t mean it can’t get more negative yielding.” Falling yields mean rising bond prices and gains for investors, at least on paper."

I expect to have a high-yield company issue a negative-yielding bond,” said Martin Reeves, head of high yield at Legal & General Investment Management."


Why don't these investors trade my paper: bonds issued by my Smoke Weed All Day Inc. are rated AAAAA++. The money lent by investors goes straight into an escrow account from where it will be refunded upon maturity. Safer than Treasuries, you never have to worry about entitlement spending.

We don't touch any of the principal. We just use the -0.01% interest to buy weed and smoke it, thereby stimulating the farming economy hurt by the trade war and also raising GDP.

If you get in on the ground floor of -0.01% yield, you may be able to trade it all the way up to a yield of -10% in the coming weeks.


RuleNumberOne

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Re: Negative interest rates take investors into surreal territory
« Reply #71 on: July 15, 2019, 07:39:28 PM »
https://www.ft.com/content/f176544a-a6ee-11e9-b6ee-3cdf3174eb89

"The fall in yield has pushed the gap between seven-year Greek and German debt — seen as a key barometer of the perceived risk of holding the paper — to around 1.8 percentage points, from 4 points late last year."

Are spreads between Greek and German debt headed to 0?

JimBowerman

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Re: Negative interest rates take investors into surreal territory
« Reply #72 on: July 16, 2019, 10:15:45 AM »
Everyone seems to think that low nominal yields imply "free money" or "central bank manipulation", but let's look at some historical data and see if there's really any difference between say 1960-2005 vs 2005-2018.  At least compared to the pre 2005 era, have central banks really started printing more "free money" since 2005?

From 1915 to 2000, US nominal GDP averaged about 6.75% and 10 year bond yields averaged 5.5% or so.  Given 4% or so NGDP going forward, are 2.5% bond yields really implying "Free money"?  Or these low yields simply a continuation of the pattern of bond yields averaging a bit less than expected NGDP growth going forward? I'd argue it's the latter....

Next let's look at Germany. German NGDP averaged about 8.5% from 1960 to 2005. During that time, German 10 year bonds averaged about 6.75%. Since 2005, German NGDP has averaged a paltry 3.0% with German bond yields averaging about 2.25% during that time frame. If anything one could argue that German NGDP will be lower than even 3% going forward, so the 0% bond yields don't seem extremely out of the ordinary. Possibly a bit low, but given other EU bank regulations etc, it's far from abnormal.  What would be abnormal is significantly higher German bond yields given the unlikelihood of higher German NGDP going forward.  If folks are going to argue for higher German bond yields, then first they need to explain why German NGDP will be higher going forward. 

In my opinion the ECB has shown few (if any) signs that they desire higher NGDP growth going forward, making the low EU yields about right in my opinion. 

Far from "Free money", the low EU yields accurately reflect the low EU NGDP expectations going forward
« Last Edit: July 16, 2019, 11:04:57 AM by JimBowerman »

RuleNumberOne

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Re: Negative interest rates take investors into surreal territory
« Reply #73 on: July 16, 2019, 07:54:44 PM »
Great article about how negative rates in Europe benefit only bond investors but hurt everything else:

https://www.ft.com/content/395f450c-a3be-11e9-974c-ad1c6ab5efd1

"The soft patch in Europe has investors clamouring for the ECB to act — yet not one of those same investors believes interest rate cuts or quantitative easing will have a beneficial impact.

Aside from throwing a festival for fixed-income investors there appear to be very few benefits and high risks from ECB action. Central banks are obsessed with credibility and power. They may not be able to turn a blind eye to a slowdown, but do they really want to reveal the impotence of their current policy tools?"


RuleNumberOne

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Re: Negative interest rates take investors into surreal territory
« Reply #74 on: July 16, 2019, 08:21:05 PM »
The central providers are fond of warning us about $1.3 trillion in leveraged loans.

What happens when the $13 trillion in negative-yielding debt threatens to unwind?

Spekulatius

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Re: Negative interest rates take investors into surreal territory
« Reply #75 on: July 17, 2019, 03:46:27 AM »
The central providers are fond of warning us about $1.3 trillion in leveraged loans.

What happens when the $13 trillion in negative-yielding debt threatens to unwind?

I am waiting for the day when a couple of negative interest rate loans default. If indeed momentum and hope for capital gains (betting on negative interest rates becoming more negative) is the driving force, then everyone knows it’s a fools game and jut hopes they can sell before the rest does and once momentum turns, things could get rather strange when everyone runs for the exit.
« Last Edit: July 17, 2019, 06:05:41 AM by Spekulatius »
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Cigarbutt

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Re: Negative interest rates take investors into surreal territory
« Reply #76 on: July 17, 2019, 04:36:03 AM »
^Whether one is expecting a greater fool or forced by a central authority, it seems that this is fertile ground for an imbalance.
https://gallery.mailchimp.com/7372687636bfa669f0a51ec26/files/3ee5faf6-38fe-412b-9305-83fcbc417eb2/2019_07_04_Betting_Against_The_Gods_Is_Now_Impossible_Charles_Gave.pdf

With the recent ECB nomination and the expected push for more easing and further dive into negative territory, it looks like Europe is following Japan in its path.
https://www.inflation.eu/inflation-rates/japan/historic-inflation/cpi-inflation-japan.aspx

A few days ago, the BIS released their half-year report:
https://www.bis.org/publ/arpdf/ar2019e1.htm
It's long and boring but I think the take-away message is the following:
"The room for policy manoeuvre to address these risks has narrowed since the Great Financial Crisis (GFC) of 2007-09, and regaining it has proved harder than originally thought. One example is monetary policy. After shoring up the economy during the GFC, with other policies taking a back seat, central banks were instrumental in supporting the subsequent recovery. While central banks succeeded, an inflation rate stubbornly below objectives even with economies seemingly operating close to potential has made it harder to proceed along the normalisation path. In addition, after the prolonged period of plentiful accommodation, financial markets have proved very sensitive to signs of policy tightening while some financial vulnerabilities have emerged. As a result, intertemporal trade-offs have come to the fore. The continuation of easy monetary conditions can support the economy, but make normalisation more difficult, in particular through the impact on debt and the financial system. The narrow normalisation path has become narrower."
Isn't value investing about intertemporal trade-offs?


John Hjorth

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Re: Negative interest rates take investors into surreal territory
« Reply #77 on: July 17, 2019, 05:33:15 AM »
^Whether one is expecting a greater fool or forced by a central authority, it seems that this is fertile ground for an imbalance. ...

I think the same way as you do, Cigarbutt,

Short/medium term, perhaps this starts as a large liquidity event, also ref. Spekulatius.

Here is a piece, that covers my state of mind recently, related to this phenomena : Scott Galloway : "Earth vs. the Universe".

[Not that is helps much, though. Watering my roses etc. doesn't help either. Nor does mowing the lawn - despite that, it's on the to do list for this afternoon.]
« Last Edit: July 17, 2019, 05:52:34 AM by John Hjorth »
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Jurgis

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Re: Negative interest rates take investors into surreal territory
« Reply #78 on: July 17, 2019, 06:28:41 AM »
The central providers are fond of warning us about $1.3 trillion in leveraged loans.

What happens when the $13 trillion in negative-yielding debt threatens to unwind?

I am waiting for the day when a couple of negative interest rate loans default. If indeed momentum and hope for capital gains (betting on negative interest rates becoming more negative) is the driving force, then everyone knows it’s a fools game and jut hopes they can sell before the rest does and once momentum turns, things could get rather strange when everyone runs for the exit.

"when everyone runs for the exit" for negative interest rate loans is no different from "when everyone runs for the exit" for the positive interest rate loans.

Also if rates go up, it doesn't matter whether the bond you held was at -1% and rate went to 1% or if it was at 1% and rate went to 3%. You gonna have comparable losses (well, the math is more complicated for detail obsessed, but you get the drift).
 
Also if negative rate loan is discounted enough, it turns into a positive rate loan on YTM.
« Last Edit: July 17, 2019, 06:50:45 AM by Jurgis »
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SharperDingaan

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Re: Negative interest rates take investors into surreal territory
« Reply #79 on: July 17, 2019, 06:57:10 AM »
You might want to step back and look at this a little differently ......

What is the practical limit to monetary policy?
Most would argue when sovereign debt (no credit risk) trades at a 0% YTM - simply because 'they', have to pay 'you' to hold their bond.
But in Europe, there are multiple sovereigns within the EU, of different credit quality; and none of those sovereigns will get to 0%, because we will cut the price of each sovereigns bond first (ie: Greek vs German bond). So ... track the the price difference on benchmark Greek vs German sovereign bonds, and look for when it sudddenly starts widening.

Why is there no fiscal policy response?
We know that borrowed money can be either helicoptered into circulation (monetary policy), or spent on public works. Yet apparently there is no infrastructure (around the world) worthy of rebuilding?, and no insurance/pension funds (around the world) looking to earn more on the fixed income portfolios - than that currently available on sovereign debt?

Because if we think there are projects, this lack of a fiscal response must be because the monetary to fiscal policy transfer mechanisms are either frozen(CB's), or broken. If they are not working, why not?

We would suggest CB capture .... and that it can be exploited.

SD


 
« Last Edit: July 17, 2019, 10:34:55 AM by SharperDingaan »