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With U.S. 10-year Treasuries yielding less than 2.2% this morning (10 years into the current economic expansion) and many European government bonds sporting negative yields, some of us may someday be faced with that question. And if you currently own an international / global bond fund, it’s possible you already own a bond having a negative yield.
I seem to recall that we discussed this quite some time ago. For the individual investor, it makes, as JoJo says, zero sense. For certain financial situations where very large amounts of money are involved, and there is a need for security coupled with a mistrust of the general financial conditions, it amounts to purchasing an insurance policy from the government as the guarantor of last resort.
I seem to recall that we discussed this quite some time ago. ... For the individual investor, it makes, as JoJo says, zero sense.
No doubt it’s been discussed before - perhaps as more of a curiosity. With some of us here approaching our “golden years” and beyond, attitudes may have changed. Beyond the age consideration (folks seeking safety), the global economic situation is far improved beyond where it was a decade ago when very low or negative rates made a degree of sense. Get into a protracted economic slide today and those already low yields would have nowhere to go but down. So I’m wondering if negative return bonds might some sense for individuals here in the U.S. at some future point. The case might run as follows:
1. Let’s assume first that cash investments (checking, savings, money markets) begin to return “0” interest rates.
2. Than let’s assume fiduciaries (ie banks, mutual funds) begin to charge service fees for being the custodian of your cash (via checking accounts, CDs, etc.) It costs them money to service the checks you write (including digitally) and to pay their employees. If they are earning 0 on their investments, why would they continue to offer “free” services?
3. Take it a step further and your options become limited.
(A) The first would seem to be to pay the fees imposed by your custodians for safeguarding your cash and servicing your account. In effect, you are earning a negative return at this point.
(B) A second option would be to stash your cash in a safe-deposit box or other secure depository. But but there are costs involved, risk of theft and government reporting (related to money laundering) should you move a large sum.
(C) The third option would seem to be to invest in a negative yielding government bond. That will cost you a percent or so a year, but might be superior to paying fiduciary fees or storing your cash. In addition, there’s a certain speculative value if you think rates will go even lower (causing the bond to rise in value).
Needless to add, one may elect to convert all or part of their cash into riskier investments like equities, real estate, metals, etc. at any time.
@hank- Thanks for the extended discussion. You raise some very interesting (and believable) scenarios that frankly had not occurred to me. I was simply comparing the present ability of smaller investors to achieve a reasonable degree of cash safety through government insured bank accounts, whereas very large deposits are not covered by such, leaving "Ø" interest bonds as an alternative of sorts.
I was not necessarily restricting my geography to the US, but including Europe, where "Ø" interest bonds (or even negative interest bonds) seems to be a currently viable concept.
Even in the face of account charges for maintaining a checking or savings account it might be preferable to bonds simply because of the nuisance of having to buy and sell bonds just to take care of everyday income and expenses. Also, direct deposits from SS and other income sources are directed to bank accounts, so it would seem necessary to maintain at least some bank exposure.
You've taken the concept to a logically possible future where, instead of being rewarded for saving, you will need to pay for protection against loss. Brilliant!
Your question presupposes that the investor faces a “problem.” If, from an investment perspective, a negative yielding bond appears to offer a better risk / reward scenario than all the other alternatives (cash deposits, stocks, natural resources, real estate, gold, collectibles), than is the negative yield really a problem? We might suppose that negative interest rates would be accompanied by muted inflation. Quite likely, we’d be in a deflationary period with many prices falling. The need to “grow” your money would have been supplanted by the need for preservation.
Traditional bonds should outperform their inflation adjusted cousins during such a period. And if you thought rates were going to keep falling, there’d be more potential capital appreciation to be earned from traditional bonds than from TIPS. Of course - there are no certainties in investing. Gold bounced $15-20 bucks today. And - miracle of miracles - Bloomberg is reporting that EM equities were largely in the green.
@MFO Members: "Gold bounced $15-20 bucks today. And - miracle of miracles - Bloomberg is reporting that EM equities were largely in the green today." This information has already been given in the Closing Bell. Regards, Ted
Do you now consider any mention of the day’s market activity by another poster to constitute an unjust and unwarranted infringement upon your endless monotonous “proprietary” regurgitation of daily market dalliances?
The mere suggestion makes about as much sense as a negative yielding bond.
@MFO Members: I strongly suggest that the above lower tier posted submit any market or investing information in triplicate to the Linkster's staff for their review in order to avoid duplicate posts. Regards, Ted
@MFO Members: "Who Cares?" The Closing Bell give investors a well rounded summary of the days stock market. As a discussion board, dedicated to funds and investing in general, the information helps MFO Members make informed decisions about their funds and ETFs.
Of course if your only interested in the up and downs of Boeing or Trump bashing one can understand why this very lower tier member would say 'Who Cares?" Regards, Ted
"The Closing Bell give investors a well rounded summary of the days stock market. As a discussion board, dedicated to funds and investing in general, the information helps MFO Members make informed decisions about their funds and ETFs."
@Ted: Yes, it does, and I personally think that it's rather well done- no argument there.
However, as usual, you pretend to misunderstand my comment. The point is that it is absurd for you to demand that other posters read each and every one of your zillion daily posts before daring to post something on a subject of interest to them.
Your pretense on this subject is wearing a bit thin after over ten years of being told this by quite a fair number of posters, all of whom, I'm sure, are of the lower tier.
Speaking of this new "tier system" Ted, could you please inform us exactly who determines who is in what "tier"? If you are unable to answer that, then I guess that I'll have to post a query in the "Technical Questions" forum asking the folks who run this show to advise us on the details of this new system. (If you think that sounds like a threat, Ted, you're quite right, but it will be fun.)
Right on @Old_Joe. Though I like the morning and night summaries by Ted, posts that generate discussion always beat links. I will never understand the "I posted first" mentality.
@hank- sorry, but I can't respond... if I'm ever going to upgrade my tier I can't be seen hanging out with the ne'er-do-wells and riffraff. I'm going to try for just a little more leg room.
Reminds me of passing through DeGaul in Paris some years ago- a cute young Air France female person asked us what class we were in, so as to direct us to the correct line. I looked at her and replied "peasant class". She wasn't sure that she had heard correctly so she said "pardon?" I repeated: "peasant class". She started giggling and replied "ah, yes sir. Peasant Class is over this way."
Regards- OJ
Shoot. I guess that I replied after all. Now I'll never get an upgrade.
Comments
1. Let’s assume first that cash investments (checking, savings, money markets) begin to return “0” interest rates.
2. Than let’s assume fiduciaries (ie banks, mutual funds) begin to charge service fees for being the custodian of your cash (via checking accounts, CDs, etc.) It costs them money to service the checks you write (including digitally) and to pay their employees. If they are earning 0 on their investments, why would they continue to offer “free” services?
3. Take it a step further and your options become limited.
(A) The first would seem to be to pay the fees imposed by your custodians for safeguarding your cash and servicing your account. In effect, you are earning a negative return at this point.
(B) A second option would be to stash your cash in a safe-deposit box or other secure depository. But but there are costs involved, risk of theft and government reporting (related to money laundering) should you move a large sum.
(C) The third option would seem to be to invest in a negative yielding government bond. That will cost you a percent or so a year, but might be superior to paying fiduciary fees or storing your cash. In addition, there’s a certain speculative value if you think rates will go even lower (causing the bond to rise in value).
Needless to add, one may elect to convert all or part of their cash into riskier investments like equities, real estate, metals, etc. at any time.
Possibly related to Mark’s post: Trump Presidency Leading to Increase in Alcohol Consumption - https://r3sist.com/2017/02/trump-presidency-leading-to-increase-in-alcohol-consumption/
I was not necessarily restricting my geography to the US, but including Europe, where "Ø" interest bonds (or even negative interest bonds) seems to be a currently viable concept.
Even in the face of account charges for maintaining a checking or savings account it might be preferable to bonds simply because of the nuisance of having to buy and sell bonds just to take care of everyday income and expenses. Also, direct deposits from SS and other income sources are directed to bank accounts, so it would seem necessary to maintain at least some bank exposure.
You've taken the concept to a logically possible future where, instead of being rewarded for saving, you will need to pay for protection against loss. Brilliant!
Derf
Your question presupposes that the investor faces a “problem.” If, from an investment perspective, a negative yielding bond appears to offer a better risk / reward scenario than all the other alternatives (cash deposits, stocks, natural resources, real estate, gold, collectibles), than is the negative yield really a problem? We might suppose that negative interest rates would be accompanied by muted inflation. Quite likely, we’d be in a deflationary period with many prices falling. The need to “grow” your money would have been supplanted by the need for preservation.
Traditional bonds should outperform their inflation adjusted cousins during such a period. And if you thought rates were going to keep falling, there’d be more potential capital appreciation to be earned from traditional bonds than from TIPS. Of course - there are no certainties in investing. Gold bounced $15-20 bucks today. And - miracle of miracles - Bloomberg is reporting that EM equities were largely in the green.
Regards,
Ted
Do you now consider any mention of the day’s market activity by another poster to constitute an unjust and unwarranted infringement upon your endless monotonous “proprietary” regurgitation of daily market dalliances?
The mere suggestion makes about as much sense as a negative yielding bond.
Have a good weekend, Derf
Regards,
Ted
Big deal. Who cares?
Of course if your only interested in the up and downs of Boeing or Trump bashing one can understand why this very lower tier member would say 'Who Cares?"
Regards,
Ted
@Ted: Yes, it does, and I personally think that it's rather well done- no argument there.
However, as usual, you pretend to misunderstand my comment. The point is that it is absurd for you to demand that other posters read each and every one of your zillion daily posts before daring to post something on a subject of interest to them.
Your pretense on this subject is wearing a bit thin after over ten years of being told this by quite a fair number of posters, all of whom, I'm sure, are of the lower tier.
Speaking of this new "tier system" Ted, could you please inform us exactly who determines who is in what "tier"? If you are unable to answer that, then I guess that I'll have to post a query in the "Technical Questions" forum asking the folks who run this show to advise us on the details of this new system. (If you think that sounds like a threat, Ted, you're quite right, but it will be fun.)
Regards-
OJ
I actually prefer lower tear myself. People down there seem a lot nicer. So, generally, I’ll head straight for the back of the bus.
Upper tear’s probably more like “first class” on a plane. Lots of big butts. Conversation’s pretty slow.
Reminds me of passing through DeGaul in Paris some years ago- a cute young Air France female person asked us what class we were in, so as to direct us to the correct line. I looked at her and replied "peasant class". She wasn't sure that she had heard correctly so she said "pardon?" I repeated: "peasant class". She started giggling and replied "ah, yes sir. Peasant Class is over this way."
Regards-
OJ
Shoot. I guess that I replied after all. Now I'll never get an upgrade.