Marc Cuniberti: Ins and outs of negative interest rates
Negative yield, also known as negative interest rates, have been all the rage recently on the world economic stage with over $10 trillion worth of sovereign bonds yielding less than zero. (Bloomberg news).
A difficult concept to grasp by the average investor, negative yields mean that lenders buying up government IOU’s with this yield will get back less than they loaned out when the IOU’s become due.
Japan and France are leading the way in issuing negative yield bonds with Japan offering 20 year bonds and France with 9 year maturities and both have negative yield.
Although currently the U.S. has not offered negative yield on its bonds, many countries in Europe and surrounding areas have successfully done so, evident by the massive and very successful issuance.
One might ask why investors would buy a bond that pays back less than what was loaned out?
The key to understanding this is knowing how large money holders do business. Unable to put their money in an insured savings accounts like you and I can due to the large amounts of cash that need to be placed, government bonds are the common hiding place for huge money depositors.
Government bonds are considered one of the safest investments due to the fact that governments for the most part can’t go broke and therefore default on their debts.
Not that it hasn’t happened but it is a rare occurrence in today’s world of central bankers and the International Monetary Fund (IMF) who can and have backstopped entire nations that needed additional funding to enable them to pay their debts.
One just has to look at the many bailouts provided to Greece and Puerto Rico, to name a few. These governments and indeed many others had found themselves in a monetary bind needing outside funds to pay their bills and almost without exception central bankers have provided such funding.
As interest rates remain at historic lows in many parts of the world and the demand for safe havens like sovereign debt skyrockets, many governments have found themselves able to borrow money at the favorable rates that negative yields offer. After all, what better way to borrow money than to pay back less than what you borrowed, in essence making money on the deal. Theoretically, the more they borrow, the more money they make!
What a crazy world we live in where borrowers not only have to pay zero interest to borrow, they get to pay back less than the amount borrowed. And all because of the copious amounts of money that central bankers have printed up to try and save the economies and governments of the world. That money is now sloshing around the globe looking for a home, and in many cases, it finds its way right back into the IOUs of those that needed it in the first place.
This article expresses the opinions of Marc Cuniberti and should not be construed or acted upon as individual investment advice. Mr. Cuniberti is an Investment Advisor Representative and can be contacted at MKB Financial Services 164 Maple St #1, Auburn, CA 95603 (530) 823-2792. MKB Financial Services and Cambridge.
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