Buying guaranteed losses

dollarSurely one of the strangest trends on the world investment markets these days is banks paying negative rates to depositors, and bonds issued with negative interest rates. Basically that means that these institutions, and issuers, are guaranteeing a loss when you invest in their bonds or otherwise lend them money.

This unusual trend, which has been growing quietly in the background throughout Europe, became news last month when the Bank of Japan, the Japanese equivalent of the Federal Reserve banking system, announced that, starting February 16, it would pay minus 0.1% to Japan’s lending institutions on all new money deposited into the central bank’s reserve accounts. (The central bank will pay 0% on deposits required for regulatory reasons, and will continue to pay +0.1% on existing deposits.)

For the past year and a half, the European Central Bank has been “offering” sub-zero rates to its member banks—currently charging 0.3% for holding banks’ cash overnight. The Central Bank of Sweden, meanwhile, leads the world in negative deposit rates, at -1.1%. The central banks of Switzerland (-.75%) and Denmark (-.65%) also charge dearly for the privilege of loaning money to their governments.

By the end of last year, roughly a third of all the bonds issued by Eurozone governments also carried negative yields—meaning that it wasn’t just banks that were willing to buy investments guaranteed to lose money. French government bonds with a two-year maturity paid investors a handsome -.292%, and German two-year bonds reached a record low of -.348%. Now Japan is joining the fun, with two-year bond yields at minus 0.85% and bonds with 5-year maturities “paying” a negative .08%. This is the obvious reason why global investors are flocking to Treasuries and dollar-denominated bonds. The yield spread between U.S. corporate bonds and the bonds issued by foreign countries have seen a dramatic rise over the past 12 months.

Negative payments are considered to be a particularly effective way to shoo money out of the parking lot and force banks to start lending it into the economy—driving up the supply of available money and thereby driving down rates. It’s a form of economic stimulus to everybody but the banks themselves, and also lowers the value of the currency—which, in turn, stimulates exports and raises profits of companies doing business overseas. A double stimulus, if you will.

Sources:

http://www.marketwatch.com/story/what-you-need-to-know-about-the-bank-of-japan-and-negative-interest-rates-2016-01-29?utm_campaign=Financial+Planning&utm_source=hs_email&utm_medium=email&utm_content=25806642&_hsenc=p2ANqtz–HCeOHPFud4-uFeRgdjB3aJeopigWm1Le6aOwryOv_eJFt72Ys6cREZBNn8HPgSU_54Dpu6U20DP_1zxd2ouQBJUQGUw&_hsmi=25806642

http://www.bloombergview.com/quicktake/negative-interest-rates

http://www.bloomberg.com/news/articles/2015-10-23/draghi-s-signal-adds-190-billion-to-negative-yield-universe

http://www.bloomberg.com/news/articles/2016-01-29/bank-of-japan-s-negative-interest-rate-decision-explained

http://www.bloomberg.com/news/articles/2016-01-29/japan-s-10-year-yield-drops-to-record-after-boj-s-negative-rate

About Objectively Speaking

Tom Batterman, founder of Vigil Trust & Financial Advocacy and Financial Fiduciaries, LLC is in the business of representing the best financial interests of his clients. Having provided objective, fee-only financial management services for over two decades, he specializes in managing the investment and related financial affairs of individuals and mutual insurance companies who do not have the time, interest or expertise to manage such matters on their own. As an objective, unbiased professional who takes on a fiduciary responsibility to his clients, he guides clients to the financial decisions they would make themselves if they had years of training and experience and the time and expertise to fully research and understand all of their options. Founded in 2010 as an outgrowth of Vigil Trust & Financial Advocacy, Financial Fiduciaries, LLC is a financial management solution for individuals and mutual insurance companies who recognize they do not have the time, interest or expertise to properly attend to their financial matters on their own. While there are many financial “advisors”, most of them have investment products to sell and the “advice” they provide is geared toward getting their clients to engage in a purchase. As one of the rare subset of advisors known as “fiduciary advisors”, Financial Fiduciaries does not sell any investment product so its guidance is not compromised by conflicts of interest which plague ordinary advisors. Prior to his employment in the financial industry in financial advocacy and trust positions, he worked at a private law practice in the Wausau area in the areas of estate planning, tax, retirement planning, corporate organizations and real estate. He is a graduate of the University of Wisconsin-Madison and the UW-Madison Law School and has during his career held Series 7, 24 and 65 securities licenses. A longtime resident of the Wausau, Wisconsin Area, Tom is active in the community. He enjoys golf, curling, skiing, fishing, traveling and spending time with his family.
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