Why buy negative yielding bonds? | FT
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- Опубліковано 11 тра 2024
- About a fifth of the global bond market trades at negative yields. FT statistics journalist Federica Cocco explains why, and what the attraction is for investors. See if you get the FT for free as a student (ft.com/schoolsarefree) or start a £1 trial: subs.ft.com/spa3_trial?segmen...
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Hello! To everyone asking why investors aren't just holding the cash instead of investing the money. This is touched on in the video: prices can still rise for a negative-yielding bond. This price appreciation provides insurance when risk assets are slumping. Hope that helps!
But in a real crash, safe havens crash along with more risky assets, while cash remains... cash. "Cash" is the basis where most instruments are priced.
@@isabella3746 Fiat currency is not a safe haven, its purchasing power goes down during a crash.
@@DBKarel I never said fiat currency was safe haven. I am saying many safe havens, including bonds, are simply different forms of fiat currencies. That's why gold is a safer safe haven. But safe havens aren't insulated in a real crash.
I agree that this protection has proven to work as seen in the recent coronavirus crisis however are they really so worried about further negative yield movement to the extent that they will lock into paying money to lend for 30 years as opposed to holding cash? I dont get it
But then again: if risky assets are plunging, why would anyone else buy bonds instead of retaining cash? This behavior makes perfect sense when bonds are paying positive interest, because, in this case, investors are preserving the purchasing power of their money against inflation.
However, when interest rates are negative, this notion of "safe haven" ceases to make sense. Investors will be losing money! The only "safety" they have is the promise that governments will return *less* (not more) money in the future. But then I insist: why not just hold cash instead? In times of turmoil, why would anyone lose money by lending to governments instead of just sitting on it? Just because they expect others to do the same thing and then be able to make a speculative profit based on price movement? This seems like making a bet on the irrationality of the agents who still see sovereign bonds as a traditional "safe haven".
My takeway from video: we live in a topsy turvy world. 🌏⬇️
The sound effects get in the way of the message
its also the same sound as cnbc its confusinggg
Quite a good video on the topic. Though, insurance companies don't buy bonds only due to liquidity... It's mandatory under the Regulated Covered Bonds FCA's act. They have no choice and that's where the negative yield trap is.
pedro Caetano Indeed that’s the type of institutional mechanism that people tend to forget about when analysing negative yields...
Yeah I gotta say, it makes little sense how anyone missed the common sense of that. Why would you hold negative bonds “because they’re liquid” when you can hold cash, literal liquidity, and not lose money? Lol
but why pensions fonds buy bonds ? any help
@@olivergilpin "you can hold cash, literal liquidity, and not lose money?"
But that's not necessarily the case. Many banks have in fact imposed negative rates on large depositors. Also, a bank might be less safe than an entire country with good finances. (And you can't get around this by holding physical currency because storing that has its own costs and risks.)
I don't think you ever answered the question why negative-yielding bonds are purchased at all, which is the title of the video. You do mention several times that it is "a topsy turvy world out there." I read the FT every day; can't believe they produced this video.
in short: to keep portion of the investor’s portfolio liquid
But why they are not just stay in cash?at least they wont be losing money.isnt cash liquid?
Fairy Liquid
It is all bubbles
But inflation will be affect with respect to the fact that 1000 today will be worth 900 in a decade or so saving cash is actually better
@@vanwandererx852 Because when large money (millions/billions/trillions) are involved, banks don't have the power to insure your money.
Where else do you store your wealth at that point? Do you buy a piece of land with security and all and a vault for 30 years and pray there's no robbery or fires or tornadoes and all?
Large companies don't have a "checkings" or "savings" account because the money is too big for banks.
Hence, these large institutions are willing to pay some 'fee' for governments to hold the money since they know their money is 'risk free' AND the 'fee' is a lot lower than having securities to store the money.
This has already shown itself to be a bad strategy. QE and negative rates have only flushed the market with cash and is the main reason that stock prices relative to actual earnings have inflated so much. When the US fed started to increase rates AND reverse QE the market tanked and the market reversed when they halted. The next recession will leave them with little to no room to move aside from letting the printing presses fly and inflation will skyrocket.
Welcome to neoliberalism.
1stGruhn 1stGruhn Such predictions depend on so many variables that it confines itself to a very unlikely hypothesis. Of course QE created a type of expectation pattern which obviously is part of the investment gamble, but direct investiment policies is always at hand, as the ECB itself is by now trying to push through the “Green New Deal”. A stalemate that pushes inflation through money printing would only happen if the already broken down MME happend to gain any momentum...
Sigh.....austrians
Right, with negative interest rates what’s to keep entities with good credit from borrowing to speculate in the market? No economic activity (goods or services produced) but profit id made
don't worry they're will make cash illegal later this month!
The key question that was missed here: Why not just hold cash?
Rather hold Gold. For a better store of Value.
you can hold cash but institutional investor that have hundreds of millions cannot and they are the ones that matters for the economy.
I believe this was addressed by the mention of the ECB's negative deposit rate. If you hold a sufficient amount of cash in a bank account, then the bank will start to pass on that negative rate. Less negative yielding bonds may then become a better option. (But curiously enough, bund yields are even a bit lower than the ECB deposit rate, so this is not a full explanation. ECB bond buying and speculation on even lower yields must be responsible.)
@@HareKrsna.. they are buying gold of course.but some portion of their portfolio needs to be in cash.diversification.
@@wcoenen that makes sense now.it is the explanation.
I am studying R01 and this was helpful even though I had to repeat sections of the video a few times.
2:02 about quantitative easing, does it in fact dilute purchasing power of existing money? Is it a way to compel people to spend now with the spectre of money being worth less in the future?
Decently informative video, but please go easy on the sound effects. Basic rule of editing: Just because you can doesn't mean you should.
Why are govenrment bonds considered safe?! I live in Finland (one of the wealthier and safest countries in the world) and we can’t even pay interest on our national debt!?
Lol! It's more like investors are willing to lose a bit of money buying Finnish bonds. If they were risky, investors would demand higher yields.
Thank you for sharing the video. I learnt the different betweeen bonds and yields. But I am still consfused, like many other viewers (judging by their comments), about the reasons to hold bonds against cash in a negative yield scenario.
Banks have imposed negative rates on large deposits so you can't necessarily escape negative yields that way (and holding physical currency would incur its own costs).
@@seneca983 to both of you - coupon paying bonds should be considered safe to invest even in negative interest environment. not sure why bonds with zero coupon (not ZcBs) still are bought in large numbers, against them ccy in physical form is better. they can not rise beyond a point since no coupon, so the value will only erode.
@@Rey_B Even if a bond has a coupon payment it's still probably not a good investment in a low interest rate environment. Due to low interest rates the coupon payment should be small (compared to the price of the bond) so you don't get much yield. Then, if interest rates rise back up it will collapse the value of the bond, at least temporarily. (Of course, if you hold until maturity then interest rate swings shouldn't matter in theory.)
Bank deposits probably can't be used as loan collateral, but they seem to meet the liquidity part.
But banks have been known to impose negative rates on large depositors so you can't necessarily escape a negative yield that way.
I can't understand this because underpinning all the assumptions is that the value of cash is not going down the toilet. QE and zero interest rates are effectively destroying the entire concept of fiat currency and all 'assets' which pay out government printed money...like bonds. This is a ticking time bomb and it will be very ugly when it explodes
I can say, at least, I learnt the meaning of TOPSY TURVY WORLD!
I’ll go back to work just repeating it while staring at colleagues.
Lolll 🤣 , same here
The SEPM (Sound-Effects per Minute) is over 9000!
I honestly had to stop watching bc of it
nice one for this. I am now going to check in on the bonds in my work pension to see if they look to be heading to negative territory!
Best explainer on the topic I’ve seen so far thank u!
Thank you Lola. Let us know if there are other topics you think might be interesting to explain too.
I still didn't understand.for example, there is a bond offering 9% interest (coupon). I buy 100 quantities of it at 1200$ each. Face value is 1000$. The yield to maturity mentioned is -20%. What will be the net gain/loss$ at the end of 5years period?
Every year a country is at peace (In most cases) the bond yield falls. As europe has been at peiece it makes sense for bonds to be negligible. What is strange is that instead of being asyntotic they crossed zero.
A very concise and clear explanation. What a ripoff.
Please buy our debt?!!
Great explanation so basically supply and demand bc of increased preference for safer securities. Drives up price, thus yield falls - thus negative yields but pension funds etc need to hold onto them because they’re liquid
Why can't they just hold cash instead? Surely no matter how one twists the logic, holding $100 cash means one will still have $100 in the future, which is a much better proposition than getting $95 back some years later.
@@happyday2678 There may also be a cashflow consideration. People may value having a steady stream of coupon payments to maturity, even if that means losing on capital gains at redemption. You're right though, it seems bizarre.
Consider what this means when money creation is likely to be up 300%
over a period of ten years. Any one in a bond is a fool.
very informative, thank you
Thank you!
Either capital is abundant or it’s monetary representation is very abundant. My guess is the latter since equity investors seem to still expect rates of return comparable to historical ones. Eventually the monetary representation of capital will more accurately reflect the abundance or scarcity of real capital. If real capital was so abundant the cost of equity would be very low.
But why not just hold cash instead? Surely cash is even more liquid than bonds? Are the bonds considered safer? Does the coupon compensate somewhat for the negative yield? Do the negative yielding bonds help protect against inflation?
No. Inflation is positive whereas what you earn by a holding a bond (yield) is negative. You do the math.
No they do not
Why is she not talking about coupon ? Saying that you will get lesser money than you lended , is not it a bit misleading? If you include your bond face value + coupon , do you still lose money in negative yield bond markets?
Yes
Regardless of Ponzi scheme what if you borrow money at a negative interest rate now but after that the economy collapse then hyper inflation began. Even without positive interest you now dont have the means to even pay the principal debt and your collateral for the loan would be in danger.
Superbly done. Thank you.
For this topsy turvy video, the quick summary is that
(1) some negative bond investors still feel safer than other alternatives (cash, stock etc), so much that many of them keep buying bonds driving the price up, forcing the yield down
(2) for some institutions like pension fund and insurance, they have no choice even if have to own -ve bond 'cuz need to make sure that their fund is liquid
(3) over the long term neg yield could mean lower return on pension yield meaning workers will be forced to work longer and save more. In eurozone countries people have become concerned about not receiving positive returns and started to set aside money for the future. The central banks believe this is a good strategy for the economy but there are critics.
the less topsy turvy part starts at around 4:00
Now I understand. Thanks FT. And the Zen Master Said "We'll See." ;)
It’s wrong saving is scarcity to save is to not spend that’s why you have get interest when you put your money in account saving
in short buy gold or silver
So much fo compound interest, that was a waste of time at schools
This is encouraged because bond issuers i.e governments and banks are excused in delivering less than the original amount borrowed.. What is wrong with this scenario? There is no obligation to be mindful with expenses because the general public will end up paying the costs, additionally government expenses contines to increase significantly.
Amazing analysis ! Great Job!
Wtf. So the issuers of debt are getting paid to borrow and paid by investors
In Japan and EU there's a biggest force that drives disinflation environment, called Aging Demographics. Pension funds struggle to keep up with paying yield, which push them to take more risk. The west EU countries trying to keep the boomers longer at work and incentivize automation (AI, machine learning...) but they lacking (far) behind other developed countries, even China. Bonds are also collaterals in financial system.
The issue remains largely unanswered by the video. Safety seems to be more important for many investors than benefits. However, a suggested additional explanation is inequality: the wealthier can allow themselves to lose a bit part of their fortunes at the expense of securing most of their money.
I think the most reasonable explanation is 'it doesnt make any sense'.second reasonable explanation is 'regulation'.
Spot on. The wealthy never operates like the common. That's also why they are happy to stick to under performing hedge funds rather than embrace common-man indexes.
No as far as I'm aware smart investors are in stocks rn, not bonds
These negative yield bonds aren't usually bought by individuals (wealthy or not) but by institutions.
I see the biggest bubble ever !
It’s funny ft never mentions gold or silver or crypto which much much safer than bonds with negative yelids
Serriously, plz buy our debt, please buy our debt lol
This maybe dumb question.... If u don't even get the money u paid back.... How is that a reliable investment....
Michael saylor 5xed his balance sheet in one year with btc, and everyone acts like he's crazy.
Meanwhile the financial times is shilling negative yeilding bonds lmfao
economics is simple, you trade things for cash... thats all u need to know... i use stocks bonds and cash, thats all i need... if interest rates sink even to negative -110% then stocks and bonds will raise in value, if interest rates go up then stocks and bonds will CRASH thus making your cash worth more, a stock can only go up and down, when it goes down it means dollars go up, u can buy more companies with less cash... basically if your scared of negative rates, save cash, when the rates change back and stocks crash, your cash sky rockets in value and you can buy it all :) if you think negative rates r the future then buy stocks
I don’t get the idea. Why does the bond price/yield return fluctuate? A country/corp issues a bond with a fixed return, investor buys the bond. I take it the investor can then sell the bond on the market for any price, the price goes down. But why would the yield go up on the said bond? The original bond and its yield are a fixed contract, no? The new buyer would get a bond at a discount but the yield would still be the same as in the original issued bond? The only yield that I can think of that could change is the yield for any future bonds that the said country would want to issue. So, the market is forcing the country to raise yield for any future debt it issues. If the country is doing good the yield for newly issued bonds would go down, if it is doing bad the yield would go up. Or is there more to it?
if you bought a bond with 3 percent yield and held it to maturity your yield won't go up or down with the market price. However, if you decided to sell that bond at higher price than you bought it at anytime during your ownership of it the person who bought from you will get a lower yield on the bond not you. They have the lower yield because they bought it at higher price than you did. So it is the same yield but part of the profit on it has already gone to you.
If an economy has -3% growth a -1% bond is yielding 2% real return and no chance of a bank run like a bank deposit.
A negative yielding bond in Switzerland may have a positive return for someone buying with a weaker currency much like gold.
Futures Traders can make money trading in negative yield bonds.
I suppose its mainly the Central Banks that lose money when the bond sell off starts ?
Wtf does this question even mean lol
It's over thirty years since I studied economics, formally at least but I don't see the problem: institutuions are willing to pay for liquidity and security on very large sums. Better than what I assume to be the possible alternative: some variety of financial freeze up - or is it melt down.
PS: Thank you for this explanation. Any chance of an equally painless course in microeconomics?
Thank you.
5:22 if the global value is in $tn, does that mean the value in early 2020 is around 12,000,000 multiplied by a trillion?
Ah, no. Labeling issue hopefully explaine dby the fact that the last value is around $13tn. Sorry about that.
Wait, can you clarify on the exact difference between the coupon and the yield?
Coupon is the nominal return on a bond. it is contractual and written on it. Say a $100 par value bond with 5% coupon, means you will get 5 each year, and a final payment of 100.
Now if the price of that bond is 90. the yield is 0.05/90 = 5.55%. The coupon remains the same, 5% and cannot change.
Yield = Coupon rate * Par value / Price.
Also, short term bonds don't have coupon payments. They have one balloon payment at the end which pays both the principal and the interest.
Why can't they just hold cash instead? Surely no matter how one twists this insane logic, holding $100 cash means one will still have the same $100 cash in the future, which is a much better proposition than getting $95 back some years later.
It may work for majority of mid class people. But it doesn't seem work for big investors with million pounds in cash. How are they supposed to store their cash? In the garage?
It is about liquidity for big investors/banks and will only make up a small hedged % of their portfolio in case the poop hits the fan. Also you can make money from negative yields from currency arbitrage. www.bnnbloomberg.ca/businessweek/some-investors-actually-make-money-on-negative-yielding-debt-1.1313660
As for the little people holding onto cash, notice some governments (notably Australia, India) appear to be responding by trying to phase out cash under the guise of fighting the black market. That way we'd be all be forced to accept negative yields on savings in our bank accounts.
@@youtubeuser8636 Let's say u keep $10B in the banks around the world. Is that a problem? No, the computers can handle the zeros.
Buy gold . Now a tier one asset . And physical own it . As etf paper gold is traded 100 /1
Seriously speaking, I didn't understand a single bit, except "bonds are safe investments and are gaining negative yields"
She hit on it, it all has to do with BANKS, COLLATERAL & SURVIVAL. I'll leave it up to you to figure out the rest.
so they should have stopped issuing bonds when yields reached 0% ?
Great explainer.. Explain one video everyday please
Thanks Karan. We will try! Let us know what other topics you are interested in.
@Financial Times, Collateralised Loan Obligations sounds fascinating
IFRS = An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.
Now the question is, if your so called asset is value destruction, is this a liability or asset?
Crazy to think what happened few days after this video was uploaded. Global markets upheaval
would love to see a look back lessons learned and what happened after 15 trillion in world negative debt.
1:36 does the graph include both public and private debt?
Yes, it does.
@@federicacocco9945 thank you for the clarifications
Bond market is seemingly having a liquidity trap problem, in which interest rates are low and the cash held by non-bank public is high. With central bank pushing interest rate down and injecting more money to the economies, people ought to spend more but given the low economic growth and negative interest rate, public do not have the incentive to consume more and invest or save. This turns the global economy stuck on the middle. As the journalist said, if global output and political conflicts did not improve, the global economy would not do any better.
Why don't States and governments simply buy and hold gold instead of bonds?
I would like to see how in economics classes (if those even exist anymore) how they convince students that their future isn't going to be worthless...
nobody is setting more money aside then the rich people
If people are stupid enough to buy negative yields bonds, why not make them even more negative? If it works at -0.5%, make it -2.5%. Maybe some people would still buy bonds at -10%, who knows?
If the purpose is to maintain liquidity...we dont they just keep the money, instead of investing it at cost?
Omg....im a Cocco from Philly...many people are Coco, not 2 "C"s like us. What are the odds? I swear this is crazy....i recently had a dream that i was to meet a new family member...wow...life is crazy...
why not only keep the cash to be on hand?
This is well-executed.
It seems to me that all of this quantitative easing would be unnecessary if companies paid there employees(the consumers) fairly and the government focused on growing wages instead.
That's not the case.
@@seneca983 care to elaborate?
@@internetguy1260 Quantitative easing increase the supply of base money; it's monetary policy. Level of wages doesn't affect the supply of base money one way or the other so it's not a substitute for monetary policy.
@@seneca983 that assumes the problem is a lack of quantity vs a lack of liquidity though does it not? I view it like adding more oil to an engine when the problem is actually a blockage in the flow of oil, not the amount.
Please how can I contact Donald fan? I really like what he has done for you, and I also want to benefit from it.
You buy gold when adequate yeilds no longer exists.
And enjoy your 10% yearly volatility, real safe lol
@@5astelija75 Still a better Store of Value than your fake money & I.O.Us.
As an example if you buy a tech etf and and inverse tech etf. You should stay kind of even.
Because a guaranteed -0.15% return on a bonds will always be a much better deal than an unpredictable double digit percentage of inflation on cash. Simple mathematics.
But the bond is valued in dollars so inflation destroys your yields even more
I only buy Swiss bonds. Not US bonds and other European bonds.
Everybody knows that cash is losing value in the long term.but in the short term(especially in times of turmoil)safest place to be is 'the cash'.10 billion $ isnt equal to 100k $ in the eyes of banks.they pass on the negative interest to the large depositor.(funds)
All spending/borrowing comes from savings. Discouraging savings (inflation) focuses too much on the short term and ignores the misallocation of resources for (as you've stated) "riskier debts". This hurts economies in the long run. Encouraging savings (deflation) hurts consumption now, but discourages risky debts. This helps society in the long run. This is why the global financial market is a giant ponzi-scheme. These practices within individual nations would've collapsed much sooner, but because of global deals under a global reserve currency, this process is getting much larger. We're heading towards a worldwide financial collapse as nations eventually de-dollarize.
🔥🔥🔥🔥🔥🔥🔥🔥🔥🔥🔥🔥🔥🔥
Well for normal people you can just get a few suit cases worth of $100 bills
Inflation. Use Bitcoin and Gold.
Because that's Ponzi Scheme.
That claim doesn't make any sense. Ponzi schemes don't promise negative returns, they promise unrealistically high returns.
The old have been borrowing from the youth, so inverse yielding bonds just borrow from the old to give back to the youth
useful vid, thnx
Crazy things happen about negative bond.
I need to get in the business of borrowing at negative yields.
It's easy. To be seen as reliable borrower you merely need to have the sovereign power to tax.
In negative yield bonds you are basically giving money to make sure your money doesn't devalue too much due to inflation.
Very didactic
Imagine the rates falling 1bps every time she says topsy turvy
yeah no.
The US federal reserve is the biggest buyer
You know your in the twilight zone and the world is about to go to crap when you see videos telling you the benefits of negative rate bonds. Absolutely obscured logic here.
So dumb I can't even believe the financial times posted it, but then I remember they are funded by the people who need to keep selling negative yeilding debt...
Also btc is a scam lol
This seems to be Opposite Phenomenon of Hyperinflation of 1980s Latin American Countries and 1940s Germany. Wheather it Benefits the Economy can only be determined When Phase Changes by another Monetary System.
Why would any buy negative bonds when you can get a 4% short term bond? Or you can pay down your 30 year mortgage at 7.5%.
when this video was made you could not get a short term bond at 4% lol
From Keynesian economics, international co-operation on technological innovation may help increase long run economic production if powers could resolve political issues. This may be a solution, but ordinary peasants like us do not have what it takes to interfere politics.
Money falls in value all the time due to inflation (excluding Forex trading), but Bonds may increase in value at some time. !?
You might have touched upon the notion of just holding money in cash.
Hello from 2022
I might be wrong, but here's how I understand it:
People have lot's of money. Rather than spending it, they are investing. Huge funds are created and their managers put the money into stocks and bonds. Stupid central banks decided to help the economy by printing more money, but the money keeps ending in these investments. That drives the stocks to incredible highs (Apple up by 200% in 3 years), people see that and invest even more into stocks. As insurance and because of negative rates, fund managers also buy tons of bonds, but with the supply of money governments don't even care unless they earn on the deal - hence the negative yield.
It's clearly a symptom of extremely bad management of the money by central banks, and God knows what happens when they stop "printing" huge amounts of new money, people will stop seeing huge gains in their stocks, will try to sell the stocks only to see the prices plummet. I know what, some government genius will realize we simply have to print more money and everything will be fine.
good video
Thank you!
You have an inflation of 10% or even more, and negative yield in bonds. So you lose twice if you buy a bond, so what is the catch? Why would anyone, with a brain, buy a bond?
Super akka
Professional media company makes videos like they are in high school.