PDA

View Full Version : Germany to sell


Reise
August 29th, 2016, 01:41 PM
Okay we all know countries - rather governments - issue bonds because they can't even manage their finance properly on their own.
Government bonds are simple, I need money, give me that money and I will give it back to you with interests. Yeah, just like your bank when you spent all your money in porn and need to buy a new washing machine.

So what's wrong basically? Couple of months ago I've seen that I've seen that German governments bonds were acting strange, something that never happened since I was born, since even Reagan made American great again before it turns out it was still shit.

The yield of the German government bond 10 years has reached the negatives (this is the moment when you press the big red button). Basically the yield is amount of annual interest/bond's selling price.
So this means that the interest rate is negative as the interest paid over a year is a negative number.

if you struggle to figure it out, this means that you buy a bond and it will be YOU who will give some extra-cash.
No need to explain why this is non-sense, I mean, who would invest in something that costs them money? Furthermore, a german bond? A safe haven?

There is actually some things that can lead you to throw your money in the pit, the first one being an expected deflation (everybody loves deflation, imagine you buy a 1,000€ random bond that will give a final return of 900€, so you could say you lose money, but imagine those 1,000€ are worth 800$ and that the Dollar is stable af and that between the moment you bought the bond and the moment you sell it or it reaches maturity an epic deflation made the 900€ return worth 850$ ; this is the picture).
It does not mean negative interest bonds are attractive in themselves, but depending of the context and of your balls you can make something outta it.

But seriously, this can't be the only explanation, why the zero-lower bound?

Well as always the culprit is the ECB (not at 100% though), the ECB has three key rates, three buttons it can move as it wants to make a monetary policy.
In 2014 the deposit facility rate has reached the negatives, this means that commercial banks need to pay to hold money in the ECB.
Many behaviors may arise from this, if you have huge amounts of cash but just don't know what to do with you want to put it in a safe haven, and not to build a Fort Knost 2.0.

Here's where negative yield bonds (thus negative interest rates) become really attractive, especially for "safe havens".
Say I have $10B, I pulled them out of the ECB due to a way too low deposit facility rate, I'd like to place this money elsewhere but can't reasonably take any risk, or any significant risk. So tell me, what looks the safest? Buying Brazil government bonds 10Y at 12% yield? or buying German government bonds 10Y at -0.1 or -0.2% yield?
Eh yeah, the demand for bonds increase, as the deposit facility rate falls government bonds are being favored over ECB deposit to the pint you're ready to pay for it. Well, if this is not a nice example of utility!

It's also something you get in a developed economy, where high returns simply don't exist anymore.

Though we have here a good highlight of the causality of a given monetary policy to the markets I'm sincerely not sure if this is a good thing in itself.
The point of such a policy was to incentive investors and banks to go to riskier placements. Or was the point to bring people to sage havens to the point to the point that countries are being paid to borrow money (public debt eraser 2.0)?
What would happen in the US if the Fed did such a thing?
Though according to the latest news (http://www.wsj.com/articles/feds-dislike-of-negative-interest-rates-points-to-limits-of-stimulus-measures-1472395069) this isn't really planned.

---------------------------
Helpful links:
German government 10Y bond yield (http://www.tradingeconomics.com/germany/government-bond-yield)
Brazilian government 10Y bond yield (http://www.tradingeconomics.com/brazil/government-bond-yield)
ECB's deposit facility rate (http://sdw.ecb.europa.eu/quickview.do;jsessionid=589C050D17D71600910CC609B1616E33?SERIES_KEY=143.FM.B.U2. EUR.4F.KR.DFR.LEV)
Bloomberg's additional info for German bonds (http://www.bloomberg.com/markets/rates-bonds/government-bonds/germany)

Flapjack
August 29th, 2016, 01:44 PM
I do not know enough about economic to guess why but can't the German government just make it a positive interest rate + inflation so people lend them money?

Reise
August 30th, 2016, 11:22 AM
I do not know enough about economic to guess why but can't the German government just make it a positive interest rate + inflation so people lend them money?
Yield are "discussed" on the market, you can't do everything you want with it.
And even, I think the German government doesn't hate this situation, after all in the end they earn money.

Inflation is of the responsibility of the European Central Bank, which works on an independent central bank model, governments don't really have their word to say.

jamie_n5
August 31st, 2016, 11:17 AM
This all seems confusing and unfair to me. Why can't the German government just do regular savings bonds like others do?

Paraxiom
August 31st, 2016, 12:25 PM
Is this related in any way with some situations where main electricity consumers had negative bills for using the service?
(Apologies for my ignorance generally with this, and specifically if it is clear that it is / is not related.)

Reise
August 31st, 2016, 03:23 PM
This all seems confusing and unfair to me. Why can't the German government just do regular savings bonds like others do?
US savings bonds are particular, while their yield is fixed by the US government they are on 30 years and their issuance follows some strict regulations.
They are mainly targeting good 'ole patriot Americans who want some extra-cash for their retirement, at least it looks like, considering the Treasury Department does all it can for it.
Still, this wouldn't be a great idea for Germany, the current situation is not too bad for them.

Is this related in any way with some situations where main electricity consumers had negative bills for using the service?
There has been such an event in Germany, but it was because of an over-production of electric power.

Paraxiom
August 31st, 2016, 06:05 PM
There has been such an event in Germany, but it was because of an over-production of electric power.

It was yes, alright then.