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This Is What Your Future Looks Like: Pay To Save
Now that 2-year government debt carries a negative yield in no less than nine European countries, the trend is spreading towards investment-grade corporate bonds (with at least a BBB- credit rating).
The actions of the ECB – the quantitative easing – have made people anxious in their search for returns on the market and some investors are jumping in blindly, taking risks that often do not match their investment risk profile.
Just a year ago, investors who no longer found refuge in the low yields on German or Dutch government bonds could still turn to qualitative corporate bonds; these still offered an attractive spread at the time versus government bonds.
But lately something strange is happening in Europe. A whole range of bonds, especially government bonds from countries like Denmark, Switzerland, and Germany, now have negative yields.
- Finland was the first country in the Eurozone to sell debt at negative yield.
- Germany and Denmark have negative yields on bonds with maturities up to six years.
- In Switzerland you have to wait 14 years to see a (very small) positive yield.
- Even Slovakia is now selling short-term debt at negative yields.
It does not get much crazier than that …
No sense
According to JP Morgan, 1,500 billion euros worth of bonds will mature in over a year with a negative yield. Countries with less favorable credit ratings have also seen their yields drop spectacularly.
A country like Ireland, for example, that was practically broke a few years ago, is now issuing bonds that carry a yield of no more than 2%! At first sight this does not make sense. Why would you lend 100 euros only to get back less in return?
This seemingly goes against every economic theory book that states that inflation devalues money in the future and that investors should demand compensation based on their current inflation expectations.
Nevertheless, investors are acting based on (admittedly twisted) economic logic. Consumer prices in the Eurozone are namely falling by about 0.6% per year and Europe is still stuck in a very deep swamp, economically speaking.
You lose money if you invest in bonds that have a negative yield, but you are still outperforming your good ol’ savings account. Bonds are not just an investment, they also provide security for banks, hedge funds, and other parties on the financial markets.
They need these bonds for so-called repos, which is where you sell a bond for cash and promise to buy it back later with interest. That is very important and not only because the repo market is enormous.
Not Enough Bonds
Look at it this way: if you can turn a very safe bond into cash whenever you want, the bond becomes a very liquid asset. That makes that people will want to pay more for it, which pushes yields down even more.
There has always been some sort of a premium attached to qualitative government bonds, specifically for that reason. Today everyone is throwing themselves onto bonds because of the aforementioned logic, but also because there aren’t enough bonds available.
The strong budget cuts in Europe have strongly contained the amount of government bonds that can be issued, in order to minimize budget deficits, and the QE measures of the ECB are going to suck all of this debt out of the market now.
Banks that need government bonds will now need to look for alternatives: high-rated bonds from the most well-known and strongest companies. This brings us to Nestlé, the Swiss multi-national corporation known for its tasty cookies and other retail products…
The company is active in practically every corner of the world and has an incredibly strong balance sheet, which translates into an Aa2 credit rating. For the first time in history, the yield for a corporate bond of a company in the Eurozone turned negative.
Nestlé namely issued 500 million euros worth of 2016 bonds with a yield of … -0.002%. Never before have we seen something like this in our 20 years on the financial markets.
Source: Confounded Interest
The yields on Nestlé bonds with a longer maturity are also not very inspiring: bonds that mature in 2021 only have a yield of 0.33%. Nestlé is not the only company that is selling bonds with these yields, by the way (check the table below for reference). A year ago, you at least got something.
Race to the bottom
If companies and governments in the Eurozone will continue to sell bonds at these yields, the bond market will start to shrink once the ECB starts buying in March. The purchases of the ECB will outweigh what will be on offer month over month.
Source: RBS, Bloomberg
This is a race to the bottom considering the fact that the spreads on corporate bonds are narrowing. The corporate bond market is thus now also seeing yields go down and spreads get increasingly narrow.
This will push investors to take more and more risks for the same return, which puts them in a position where they will not be able to correctly judge their investments; all because of the aggressive policies of the ECB. This is a dangerous situation that can lead to accidents in an investment portfolio.
Be aware of the above and keep your eyes open. Those with enough cash and gold in their portfolio will be well-protected. Pay attention to fixed income investments with negative yields, low liquidity or maturity dates that are far in the future. Inflation is a phenomenon that can pop its head up unexpectedly and do serious damage in one-sided portfolios.
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Ya gotta luv James Grant referring to governmet debt (US explicitly) as return free risk.
Timmah Geithner managed through his successor to shred one of those ratings agencies which downgraded US debt. S&P I think? Just made a big settlement.
One wonders why James Grant isn't full of self inflicited nail holes for having uttered such a biting, effective, clear, and demonstrative characterization of US debt. He also refers to the PhD standard, excoriating the Fed eggheads, most of which have never had a real job.
It seems as though they actually CAN manipulate the gold market pretty effectively. The day they can't they'll pass a tax on trading gold that neutralizes any gain....or ban it's sale outright. Right now everybody who knows the true state of the economy ( precious few ) is funneling money into gold. They know where you are going, you gold bugs can be dealt with later with a simple wave of the legislative wand....you trapped yourselves in the roach motel of asset protection. Gold bugs check in but they wont check out!
I'm not a gold hater, I own a little myself...just in case I'm wrong. But likewise I also own some treasuries ( in case I'm wrong on the other side ), a little farm land, a little cash, machinery, stocks, a bank account, livestock, etc. You have to spread that net out as wide as you can because although they can manipulate gold and some other things, they can't manipulate EVERYTHING. And none of us really know whats going to happen....for all we think we see coming they might keep this monstrousity going another 50 years.
Negative interest rates makes lenders and borrowers one and the same.
The only winning move is not to play.
There is no way that I will accept to pay for lending. So if anyone does it just stupidity driven to the max. There is always an altenative to bonds, nobody needs bonds of states. And evern harscher nobody ever shoiuld lend any money to governments. The fact taht so many still do that just confirmes that they want to be suppressors also. Better to abuse than to be abused....
Something about having to show losses with one hand, while the other hand is trying to find places to hide the rest.
The picture gives it away. No left hand. This race to the bottom is a false veil. Something else is going on. Big.
I'm a bit of a noob - so can you explain what you mean by "Something else is going on. Big."
I get the sense that something is going on - but I'm not sure how to interpret all of it...
All you fractional reserve banking fans cry when you dont get a positive intrest rate and then complain how the FED and banks are out of control with monitary base expansion. Cant have it both ways.
You know, you dont have to pay to save, you can do this wonderful thing called hold cash.
Im pretty convinced we are heading into massive deflation at the moment... because these 2b2f banks are just going to sit on trillions of FIAT they stole into existance over the past decade until some event vaporizes it all.
Everything points to it IMO an aging population, lower birth rates, more sick people as % of population . . . more govt more taxes... asset prices will go down eventually , and I mean real stuff like real-estate, cars, etc... there is simply going to be more supply than demand at some point.... and combine that with low labor participation . . . and a weak economy, money/cash will be in demand... and will rise in value.
Mason jar in the back yard. Been used for 200 years at least.
Pay to save?
The fuck I will.
Let me understand this. You want a savings account, which has on-demand access to your money, allowes convinient use of checking or debitcard, keeps it secure from robbery/loss (insured), and you want the bank to pay you for the service? LOL!! The only way that is possible is through fractional reserve banking, where the bank is allowed to loan out the money yet maintain the services outlined above. How do you lend long and borrow short? allow expansion of the money supply through fractional reserve bankining.
Do you have the hots for Janet Yellen?
Precisely the reason there is no room for banks in bitcoin ecosystem.
pay to save, pay to play, pay to leave.
one way or another, you will pay.
resistance is futile, you will be assimilated.
You could always make them pay first.... ;)
Now THAT sounds like economics I coulld get behind.
How do you like your banker? Medium rare, a little pink inside?
Proof reading is not just for cereal boxes, and it would help credibility.
It's nominally, not namely. Nothing new, much less insightful.
We need commentary about the untended consequences of this madness. There will be many. Count on it.
keep stacking bitchez
Whew! When this bubble bursts all Hell is going to break loose!
All it will take is a tiny amount of inflation, or an up tick in interest, and people will plug the door trying to get out.
What a conundrum!
They want you used to it, it is happening and can't be hidden. So it must be normalized so it will be accepted.
Expectations must be lowered. Holding money must be made more costly, so it can be forced out and spent. You must rid yourself of the notion that you can ever save enough on your own...either invest in the 'proper' vehicles, or spend.
Your money basically comes with an expiration date, as anyone who does the devaluation/negative interest math can see.
Unless you convert it to something else. Something hard and physical.
People really should start thinking of fiat as just another consumer-good they need for certain things, and 'buy' it when needed, as needed. Like Chuck E. Cheese tokens. Which is basically what it is.
Your money basically comes with an expiration date, as anyone who does the devaluation/negative interest math can see.
Unless you convert it to something else. Something approved, hard and physical.
welcome to BIZZARROWORLD..... where you are forced to LOSE money to 'save' it
In WHAT f'in world does this make ANY sense? .... unless the whole point is to get you to spend every cent as you earn it on basics - and BORROW (putting yourself into permanent debt) for anything substantial in cost...... and forget about saving for your 'future' or 'retirement' - you will be at the mercy of your 'benevolent' government.....
'Safe' government bonds COST you money to 'save' ONLY because government can create more money out of thin air.
'Money' in the form of government issued fiat can no longer be viewed as a store of value or as a store of expended labor.
Under these circumstances it makes NO SENSE to 'save' in ANY form of fiat, in ANY form of financial institution. You might as well convert any 'surplus' funds you have into something with tangible and lasting value instead of putting it in a bank where it may be used as the bank sees fit - with no 'profit' to you and you bearing the risk of loss.
Isn't this the behavior you see in hyperinflation economies? people SPENDING 'money' on somethign w=with tangible and lasting value instead of leaving it in a bank to LOSE value?
Physical gold, purchased for long term holding at below the cost of production is THE no-brainer of the century.
Gold could go lower if oil goes lower but that would be a disaster for all 'investments.'
Gold could be driven lower through short selling paper gold but that would wreck the gold market and physical gold would go higher even as paper gold continued to tank.
....tell your dad to buy bullion.
"Gold could be driven lower through short selling paper gold but that would wreck the gold market and physical gold would go higher even as paper gold continued to tank"
So far that has not been shown to be the case at all. It seems as though they actually CAN manipulate the gold market pretty effectively. The day they can't they'll pass a tax on trading gold that neutralizes any gain....or ban it's sale outright. Right now everybody who knows the true state of the economy ( precious few ) is funneling money into gold. They know where you are going, you gold bugs can be dealt with later with a simple wave of the legislative wand....you trapped yourselves in the roach motel of asset protection. Gold bugs check in but they wont check out!
What ever god created me, if any, added an expiration date so really it does not matter. You never know and I ant a gambler but mine may well be up before said fiat. Sprott and alike ilk have been pushing metal coffin hindges for years, even before 2008 wobble.
If you are purchasing PM's wisely, they should NEVER become 'coffin hinges'...
No one worth listening to advocates putting ALL your wealth in gold doubloons and burying it in the backyard.
You put a PERCENTAGE into PM's, and of course mind your fiat investments closely...It is insurance for when everything goes to hell. It means that in catastrophe, you will retain SOMETHING.
It does NOT mean you will profit. It means you will have the better by far chance of making it through in SOME kind of economically-functioning condition.
Or, you can see it as the 'coin' for Charon, so you can cross over to the next system. Doesn't matter how much you have, but if you don't have any, you ain't going...
Any chance that with zirp and nirp they want everyone out of cash before they jack the rates up and lock anyone out of taking advantage of higher rates? I don't know the mechanism involved it just seems they are herding us that way.
By the time we see higher rates the currency will be worthless anyway...100% return on a pile of shit isn't very attractive.
Am quite glad I'm near the end of my lifetime. I can't imagine how much worse things are going to get.
I'm guessing someone like you said the exact same thing 50 years ago, yet here we are, until we are no longer. While not near the end of my lifetime Lord willing, unless taken much sooner than I think, I'm glad to be alive. With all due respect, yours is the exact attitude the overlords would prefer. The last thing they want is a populace with a zest for life that they have little control over. The one thing they can't take away from anyone is an individual who, no matter what adversity faces them, still wants to live and accomplish things in life. I still have kids to raise, provide for, and educate about all the crap going on around them, gently nudging them to question things and not just pander to the state.
Me too. For the first time in my life I can honestly say I'm glad I'm not younger. I've had enough of the failed human experiment
not me. wish i were younger. i see a lot of chaos and turmoil coming, it's a great time to be alive. people have forgotten what it means to be alive. maybe they will wake up.
GGGGGGIIIIDDDDDDDDYYYUP !!!!!!