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.
- 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
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.
- More Currency Wars: Swiss Central Bank Poised to Cut Interest Rate to -1.0%
- Inverted Negative Yields in Germany and Negative Rate Mortgages.
- Fed Trapped in a Rate-Cutting Box: It's the Debt Stupid
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.