Would You Rather Have A Dollar Today Or 89 Cents Ten Years From Now?
On August 16, the yield on the Swiss 10-year bond fell to -1.132%. Consider the implications.
Swiss Bond Yield Calculation
Calculation from numbers I plugged into MoneyChimp.
Someone "investing" in Swiss government bonds rates will get back about 89 cents, ten years from now, for every dollar invested today.
Logically Impossible
This is logically impossible, yet, it's happening.
There's far worse.
Price of Austria 100-Year Government Bond
Bond craze accelerates w/ Price of 100y Austria bond jumps >200. Has gained 74% ytd. Chart looks like dot-com-boom 2.0! pic.twitter.com/aW2vzjVcEy
— Holger Zschaepitz (@Schuldensuehner) August 15, 2019
The 100-year bond trades at 200% of par. You get half your money back if you live long enough.
Madness? You bet.
17 Trillion in Negative Yield Bonds
Bloomberg discusses Ways to Profit From $17 Trillion of Negative-Yielding Debt
The article mentions three ways to play.
- Carry and Roll
- Currency Hedging
- Playing the slope of the curve in one currency vs another
My suggestion: Don't.
The article did not mention risk. This is not "free money" as the article makes it appear.
The chart below shows one of the ways such schemes to pick up a few basis points can go hugely wrong in a hurry.
How Losses Can Build Quick
If Austria's century bond yield rises to where it was 3 months ago- i.e. 1.5%- it will result in a -37.8% loss. pic.twitter.com/ZPZLKpgmCX
— Geoffrey Batt (@geoffreysbatt) August 16, 2019
As a technical point, the loss would be +37.8% not -37.8%. The return would be -37.8%.
In addition to yields blowing up, currency moves can also get out of hand and hedges aren't perfect.
Some hedge funds are going to get burnt badly doing what the Bloomberg article suggests.
Currency Wars and Monetary Madness
17 trillion in negative-yield debt is proof of currency wars and monetary madness.
Globally, central banks want to cram more debt into a monetary system that is choking on debt.
27% of Investment Grade (IG) bonds globally trade at negative yields. 10% of corporate IG bonds globally trade at negative yields. (via DB) pic.twitter.com/0npIwzFU7u
— Holger Zschaepitz (@Schuldensuehner) August 18, 2019
Meaning of Zero
"Zero Has No Meaning" Says Greenspan: I Disagree, So Does Gold
Alan Greenspan is wrong. Zero is very meaningful with negative being even more meaningful.
Negative #yields are taking over the world! pic.twitter.com/dUAtVEEHrO
— jeroen blokland (@jsblokland) August 18, 2019
Brick Wall
Negative yields mean central banks have hit a brick wall.
They cannot cram any more debt into the system. There is no tolerance for paying interest.
The evidence is overwhelming.
Disclaimer: The content on Mish's Global Economic Trend Analysis site is provided as general information only and should not be taken as investment advice. All site content, including ...
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