Negative Swiss 50-year bond yields just shattered the global insecurity barometer


#1

[Read the post]


#2

Cuckoo clocks are German. Usually from the Black Forest.


#3

Surely it’d be better to just hoard an equivalent pile of Swiss currency?


#4

But… But…

The Fed is at WAR with cash because of their longstanding policy of having a target inflation rate of 2% and that means inflation is ALWAYS bad because the at means the Fed wants my savings to decline in value by 2% per year and…

froth
foam
rant
spew spittle

/s


#5

True, but considering we don’t have a fixed amount of cash/money in the economy (or allocated per person) having an inflation rate of zero or less is not a good thing. Take the stock market for example, if you bought into Tesla before the Model 3 went on pre-order and then sold it off a few weeks later and lets just say made a 5% profit…that money physically came from nothing. Realistically it devalued the rest of the money in circulation by a tiny amount. Inflation pretty much has to exist unless the federal reserve starts removing money from the economy, which is realistic terms wouldn’t be good, and in speculative terms would be horrific.


#6

This is a symptom of the ever greater concentration of wealth. Rich people have ever more savings to invest, but most people don’t have more money to spend, so there’s little reason to invest in the expansion of business to make more products that people can’t afford to buy.


#7

There are a couple of reasons why that might not be better. For instance, if you store it in a bank account, the bank may fail – if the amount in question is greater than whatever deposit insurance is widely available, then you are essentially paying for insurance in the form of the negative yield.

Another possibility is taxes. Some European countries have a wealth tax in addition to income tax, either straight up, or as an “effective income” on illiquid assets-- if you have $10M in assets such as a castle that has been in your family for generations, they assume that you could be earning $300k/year on that asset, and you pay taxes on that $300k. A negative yield government bond may be exempt from wealth tax. I don’t know if that applies in switzerland.

The third possibility (at least in the US) are “TIPS” bonds, which are inflation protected – The face value is adjusted for inflation, so while these bonds have lower yield than an equivalent standard bond, they are a hedge against inflation. It doesn’t sound like these negative yield swiss bonds are inflation protected, or they wouldn’t be making such a big deal about them being negative yield.


#8

Last week, Switzerland announced that all of its bonds would pay negative yields, even the 50-year ones. That means that Swiss authorities have taken the market’s temperature and concluded that there’s a lot of money to be earned in betting that things will only get worse for the next half-century.

This makes it sounds like the Swiss are the ones making this decision to go negative. They have some control, but this is really more about investors deciding they’d rather lose a little money to the Swiss than risk it somewhere else. In that sense, it’s not really the Swiss making a bet that things will go bad, but an expression of the fact that investors think things will go bad.

Second, unstated in both this post and the linked article is the role of exchange rates. If you have Euros (or Pounds), and you convert to Swiss Francs now, buy Swiss bonds, then get a negative return on those bonds, then convert those Francs back to Euros, you may still end up with more Euros if the Euro falls in value relative to the Swiss Franc.

Granted, theoretically, you could just convey Euros to Swiss Francs, put the in a bank, make zero interest, then convert those back to Euros later. So why park the money in bonds with a negative interest rate instead of a bank offering zero interest rates? One reason is counter-party risk. Basically, it’s a measure of who do you trust more to still exist in the future? Some particular bank, or the Swiss government?

To sum it up, this isn’t so much about the Swiss gov’t “taking a bet,” but rather an expression of the belief on the part of investors that the countries, banks, and currencies of Europe are risky places to put your money. People don’t want their money in England or Germany, or their banks, or denominated in their currencies.

It is true that the Swiss are doing what they can to keep yields low/negative. That’s because they don’t want all this money flowing in. You see, the first step to parking your money in Switzerland is to convert your money to Swiss Francs (sell your currency, buy theirs). This pushes up the value of the Swiss Franc. This makes Swiss goods expensive to buy. This hurts Swiss exports. It also means goods priced in Euros seem cheaper, so the Swiss may choose to import cheap foreign goods rather than by domestically. It means Swiss companies, whether producing for domestic of international markets will see demand go down. It means they will have to cut back on production, fire workers, etc. The Swiss gov’t doesn’t want that.

Essentially, the Swiss are screaming, “no, no, no, keep your money away from us,” and the rest of the world is saying, “We think every other place is too risky. We’d rather you hold our money.”


#9

It’s like the world is begging for governments to all be Keynesian, saying, “Here, take our money and spend it on whatever, we don’t care, just protect us all from the horror of free market capitalism!”

Of course, this flies in the face of the free market fundamentalists who promote austerity…these governments aren’t ALLOWED to spend this money on improving their people.


#10

so, if those bonds loose you money, won’t the Swiss bond market take a hit?


#11

The only way a 50-year negative-yield bond makes any sense is if you believe in deflation

I am just a simple folk, but from what I understand it’s not quite as linear as that, because the market for government bonds doesn’t consist of people buying bonds and waiting for them to mature– they’re actively traded commodities, which go up and down based on factors other than their face value.

From the Swiss government’s point of view, they’re not going to pay more interest than they have to. And as long as there’s enough long-term pessimism around today, they can borrow at low or negative rates. It doesn’t matter what actually happens in 50 years; if you buy these bonds now, and pessimism increases in 6 months’ time, you can make a profit selling the bonds. You don’t want to be holding that piece of paper if / when things start looking rosier, but that’s the sort of risk speculation is about.

So, yes, these bonds point in a sadface direction, but long-term econopocalypse doesn’t have to actually happen for them to make sense. The majority of the thoughts in the market’s brain are still slightly more optimistic.


#12

That’s not exactly true. The profit came from the next guy to buy that stock. To simplify the problem: Alice has confidence in Tesla and stakes $100 in stock, while Bob has less confidence and stakes nothing in Tesla, keeping all his money where it is (invested in Bob’s Burgers). After the Tesla’s Model 3 release, profits and projected value increase, and Bob now has enough confidence to buy all of Alice’s stock for an agreed-upon price of $105 instead of leaving it invested in Bob’s Burgers. Alice’s 5% profit didn’t come “from nothing”. It came from Bob, who essentially took it from Bob’s Burgers. The situation has a winner (Alice), and a corresponding loser (Bob’s Burgers). Bob’s position is unclear until he sells the stock again.

The reverse, however – losing money to nothing – is quite possible. If a meteor crashes into the Tesla factory, destroying all the stock, and all the production power, killing all the principal engineers and making the IP inaccessible – a total loss aside from insurance claims – so that Bob can only sell his stock for $1.05, then that 99% loss was to nothing. (Or rather, it was lost to the meteor, which may as well have incinerated Bob’s cash along with the factory.) That’s an “everybody loses” situation.

It’s one thing when actual value and expected value lag or lead one another, basically creating both winners and losers, and shifting the focus of free dollars. It’s another entirely when real value vanishes in smoke becomes a loser. The huge non-linearity at the point where businesses hit bottom and can never re-invest is what cripples economies.


#13

National treasury bonds are the safe option in times of global turmoil…

Depends which nation, doesn’t it? For all the moaning about the various US deficits, the financial world treats US Treasuries as the benchmark, risk-free investment. (Except when certain Statesmen tried to cause a default.)

Greek bonds, not so much.


#14

Well, actually…

Thanks for setting us all straight though. WHEW!!


#15

And then there’s the new wave of automated production coming at the end of the year, just in time for xmas.


#16

Often found near cake, yes, but jeeez.


#17

TAP TAP, hmm…VXX meter under 15. Unlike during the brexit, it was between 15-18. Today’s low, around +12 range. The leading days before June 24th was between 14-16.

Sorry, what’s the “global insecurity barometer” you’re using?

Yes, the majority of global central banks are lowering their rates even further…but that generally that directly changes short term bonds–less than 5 years. Long term bonds, +5 years, are influenced by the bond market. I don’t know why Swiss +50 yr bonds, not paying attention to their market situation. My current attention is the American stock market, due to the advantage of the majority of global central banks lowering their rates thus making capitalization easier.


#18

Thanks! That’s a great explanation and answered my question before I was even able to ask it.


#19

#20

I have a few friends in Switzerland, and they do this already. Fortunately you can just hop in the car and be at a French supermarket within an hour or so to buy all the stuff that’s expensive/impossible to get in Switzerland.