Analysis

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

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.

  1. Carry and Roll
  2. Currency Hedging
  3. 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

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.

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.

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.

  1. More Currency Wars: Swiss Central Bank Poised to Cut Interest Rate to -1.0%
  2. Inverted Negative Yields in Germany and Negative Rate Mortgages.
  3. Fed Trapped in a Rate-Cutting Box: It's the Debt Stupid

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