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Old 10-25-2010, 04:01 PM   #1
Ought Six
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Arrow Treasury sells bonds with *negative yield*

http://www.reuters.com/article/idUSN2527792620101025

You must pay the government for the privilege of loaning them money.

Wait, what?
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Old 10-25-2010, 04:10 PM   #2
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What gets me is that people actually bought them...mindboggling...
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Old 10-26-2010, 11:48 AM   #3
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Quote:
Originally Posted by Bibliophile View Post
What gets me is that people actually bought them...mindboggling...
Maybe the word is ... frightening.... Probably the cleanest example of irrational financial behavior I've ever seen.

Even if there was going to be deflation, nobody should EVER buy a bond with a negative yield. To see why, note that these people paid about $1.0055 to get back $1 in 5 years. An alternative strategy that ALWAYS dominates this strategy is to put your money in a safe. (That is, even if there is deflation, it's better to pay $1 to get $1, than to pay $1.0055 to get $1).

There are some well known papers in the Econ literature that show that if agents are rational, then you can never get negative nominal bond yields.
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Old 10-25-2010, 04:30 PM   #4
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You could try Wall Street but this safer...
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Old 10-25-2010, 04:41 PM   #5
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Deflation. Great - just what we needed. The only thing worse than inflation is deflation.
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Old 10-25-2010, 11:08 PM   #6
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deflation with a congress bent on pulling back on spending
or
a slide of tiny razors into a pool of rubbing alcohol (death by a thousand paper cuts)
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Old 10-26-2010, 02:33 AM   #7
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Arrow

It:
Quote:
"a slide of tiny razors into a pool of rubbing alcohol (death by a thousand paper cuts)"
Your inner evil child is peering out.
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Old 10-26-2010, 09:18 AM   #8
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Christ. Remember when you could buy Zero Coupon Bonds cheap?
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Old 10-26-2010, 12:10 PM   #9
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I am still trying to get my head wrapped around this.

Maybe they think the economy will go into the crapper and since no US Government bond has defaulted it they pay the premium for safety. (There was WPPSS or Whoops in the 1980s but they was a muni. http://www.time.com/time/magazine/ar...955183,00.html )

Maybe they have a super granular portfolio and it leans to risk averse?

As for putting it in a safe, well, it will hold US$10k but US$100k?
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Old 10-26-2010, 12:20 PM   #10
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Yes, this is baffling. Kind of leads me to believe the forecast for the rest of the world's economy is not good
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Old 10-26-2010, 12:55 PM   #11
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Originally Posted by Potemkin View Post
As for putting it in a safe, well, it will hold US$10k but US$100k?
You can put $10million in a safe in a swiss bank account with no problem, with virtually no fees. (A million dollars in 100 dollar bill denominations only weighs 20.4 pounds.)

As for the economy going into the crapper, and the us govt defaulting, it still doesn't make it ever rational to buy a negative yield. That is, if the govt defaults, there's still no reason to hold bonds with a negative yield rather than cash issued by the same govt.
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Old 10-26-2010, 06:50 PM   #12
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"there's still no reason to hold bonds with a negative yield rather than cash issued by the same govt."

consider How the coming changes in the tax laws will impact the Capital gains tax rates and the Capital losses tax rates, especially at the State tax codes.

I use to buy strip treasuries because I didn't want income because in the state of Tennessee Dividends and interest are taxed where as capital gains are not taxed !

It's like a math problem.
Mathematics.
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Old 10-26-2010, 11:24 PM   #13
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Quote:
"there's still no reason to hold bonds with a negative yield rather than cash issued by the same govt."
True, but not many people want to walk around with a ton of cash in their pockets. You have to store it somewhere, and it can get burned in a fire, etc. I think there is a great deal of fear out there still, and this is like people hiding money under the mattress (i.e., they don't want to put more than $250K in the banks). Notwithstanding "proven" economic theories, bond yields are based on supply and demand for the bonds, and if there is enough demand and they trade freely in the market (especially if the Fed is in there supporting the price) there is absolutely no reason you cannot end up with a negative yield. It is simply a matter of the market setting the price. There is no artificial ceiling of 100 in the bond market - they can and do rise well above 100.
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Old 10-27-2010, 07:56 AM   #14
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They were 'inflation protected bonds' .

If you expect inflation or even hyper-inflation it may make a lot of sense
to pay an initial small premium to protect your wealth for 5 years .
( That is assuming the Government records inflation rates correctly ) .

It should be noted that if inflation occurs then the principal is adjusted
upwards each year so the bond coupon increases each year .

From the name "inflation protected' I assume there is no loss of
principal if deflation occurs , therefore in a deflationary environment
you could finish with real gains .

I believe that a lot of organisations like pension funds are heavily
restricted as to where they are allowed to place available capital
and bonds have a lot less associated risk than the stock market at
this moment ( assuming the US government does not vaporise or default ).
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Old 10-27-2010, 03:37 PM   #15
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Arrow

DR:
Quote:
"As for the economy going into the crapper, and the us govt defaulting, it still doesn't make it ever rational to buy a negative yield. That is, if the govt defaults, there's still no reason to hold bonds with a negative yield rather than cash issued by the same govt."
Yep.
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Old 10-27-2010, 04:10 PM   #16
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Quote:
Originally Posted by Sysiphus View Post
True, but not many people want to walk around with a ton of cash in their pockets. You have to store it somewhere, and it can get burned in a fire, etc. I think there is a great deal of fear out there still, and this is like people hiding money under the mattress (i.e., they don't want to put more than $250K in the banks). Notwithstanding "proven" economic theories, bond yields are based on supply and demand for the bonds, and if there is enough demand and they trade freely in the market (especially if the Fed is in there supporting the price) there is absolutely no reason you cannot end up with a negative yield. It is simply a matter of the market setting the price. There is no artificial ceiling of 100 in the bond market - they can and do rise well above 100.
Look at it as "renting the mattress you put your cash in..,"
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Old 10-27-2010, 04:16 PM   #17
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If you do not believe me perhaps this may change your perception ....


Quote:
The market clearly isn't expecting inflation right now but the cumulative effect of the first round of quantitative easing and QE2 should add to pricing pressures significantly in the next few years. So buying a 5-year TIP -- even at a negative rate -- should lead to a healthy return as long as inflation eventually picks up.


http://money.cnn.com/2010/10/27/markets/thebuzz/
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