Why Investors Ever Buy Negative Yield Bonds (And How It Can Still Make Them Money)
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- Опубликовано: 27 май 2024
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To skip past bond basics/negative yield explanation: 5:00
Link to video about negative interest rates: • How Negative Interest ...
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It's an investment that more or less guarantees a loss of money, and yet people continue to buy it. Today we explain why investors will sometimes purchase negative yield bonds.
DISCLAIMER:
This channel is for education purposes only and is not affiliated with any financial institution. Richard Coffin is not registered to provide investment advice and as such does not provide recommendations on The Plain Bagel - those looking for investment advice should seek out a registered professional. Richard is not responsible for investment actions taken by viewers.
I bought a negative yield bond once, but they called it a University loan.
😂
Well, he did put a link to 5:00 in the description for those who already understood the basics. RUclips has a relatively young audience, many of whom might be taking their first steps into investing, so it might’ve been the right call to start with the basics. He could also have done the popular strategy of linking to another video that explained the basics, but you’re right in that RUclips favors videos that are around 10 minutes so they can show more ads to the user.
@@karlwheeler9076 ah i didnt see that.
I think you sold a positive bond...
Dude that’s literally the funniest comment I’ve seen all month hahahaha
There really are only 2 reasons to buy -- 1. you have to; 2. you think interest rates will get even more negative and your bond will appreciate in value. Your other 2 reasons are just a subset of these two reasons. Nice job btw.
No, negative yields are policy driven by the central banks in a way like a wealth tax, it forces the holders of wealth which is the banks to push these funds into investment to stimulate an economy that is struggling to grow, its disincetivizing saving the money that is why only EU and Japan are doing it. The only time negative yielding bonds for corporates happen is when the market sees a big correction ahead that they are rushing to put the funds in down side protecting bonds even though its gonna cost them a negative interest rate. So in a way its like an insurance premium, you pay for the negative interest and in turn it will minimize your losses
I heard an investment guru call negative (or even low) interest bonds "return-free risk." :)
Fourth reason sounds like a game of musical chairs. Everyone knows the music is bound to stop eventually, yet they still choose to play.
Yep, exactly why it’s not suitable for ordinary folks. You have to (1) have an educated guess about where the market’s headed, something strong enough to justify losing money the whole time you hold this position, and (2) be actively engaged enough to move quickly when conditions move in your favor.
If you need to park a large amount of cash and can't take the risk of the bank defaulting, you might also be willing to buy negative yielding government bonds.
That's a very scary proposition.
Yep, FDIC only insures $250,000 per account in the US (I'm assuming it's similar elsewhere), so it makes sense for wealthy individuals to buy negative interest bonds for safe storage of wealth.
I wonder what would happen if you hold a large amount of cash in your brokerage account in case they go bankrupt, anyone knows?
@@2011October14 In the US, brokerage accounts are typically covered by SIPC up to some amount for cash and certain assets, similar to the FDIC arrangement for savings accounts. In other countries things may work differently, e.g. I'm not aware of any guarantuees of non-cash assets here in Belgium.
@@yazeed0ps3 It's only $50k here in NZ. Pretty disconcerting when you regularly have well over that.
You can become Kurzgesagt of finance
Who says he aint?
i thought the channel is suppose to be one?
He already is
I recall having a conversation with a fund manager late 2019, and I posed this exact question. Her explanation was essentially that there is profit to be made through currency (assuming similar to currency swaps) though it largely went over my head. I've always been frazzled about negative interest rates.
Makes sense if you don’t think about it 😅
Hey pierce how are you
lil bean Good thanks!
Hey hostalgic ice, how are you
08:09 "Bonds increase in price when interest rates fall, and they could fall further still, something that would raise bond prices higher." Now THAT is not a fiercely vicious circle, is it? :/
@@democrrrracymanifest I wouldn't say German bonds are safer, overall the us has never defaulted on its debts, and the us hasn't had a major government crisis since the civil war. Germany was united in 1870, lost a world war, had a major government overthrow, lost ww2, got divided for more than 40 years, only really getting together since 1990. By history the judge, there is no comparison. The low rate is trying to stimulate the economy by encouraging borrowing and people to invest their money into stocks, real estate, etc instead of saving their money, something most Germans love to do.
220k subs, I have been here since he had less than 10k. Amazing work
I'm holding out for negative yield mortgages. I heard they have one in Denmark.
Likely not happening. Fed officials a month back even indicated they'd seen the research on negative yield bonds and said it wasn't something they were interested in with all other tools they still have to play.
Well, dont hold your breath. The credit institutions are raising their administrative fees as much as they need to remain profitable.
Raynaldi Purnama Yes you’re definitely right that lower interest rates lead to higher housing prices. But I already bought in so I don’t care.
This man should start a bagel shop.
Awesome video! Love how you broke things down and made it easy to understand. 10/10
I always feel smarter when I watch your videos.
Video starts at 5:00 if you understand the basics
Such a good informative video, mate.
That's top-notch quality.
I love the humorous touch at the end.
Excellent video right from the basics . Just the video i needed. Thank you!
Thank you for covering this topic
Can you do a video on real return bonds and what advantages they have over regular bonds?
You answered a question which was wondering about for a while now. Thanks a lot.
Best explanations I've heard. Thank you.
Great channel, keep up the good work!
Richard Coffin, congratulations and thank you, explained perfectly.
Cheers frrom Spain.
I have learnt something new today.
Thank you very much.
Thank you for this type of content :)
Very well presented material, good job.
Thank you for these videos, Your channel has helped me learn so much. Please keep making more.
I always wondered about this. Thanks for the explanation. Do you have a video explaining how share buybacks benefit shareholders?
I'd recommend Ben Felix's videos for some deep dives into dividends/stock buy backs, but I can try a written explanation here.
Dividends and stock buybacks are (ideally) a company telling it's investors that it does not expect all of it's profits to be usable in effectively expanding the business. Think about it like this: the money for buybacks (or dividends, they really are two forms of the same thing) comes from profits. What else could be done with those profits? Well, they could be re-invested in the business. This could mean expanding the number of employees, raising employee compensation, or purchasing capital goods. But there's not always gains to be had from those actions. If the market for the goods/services the company makes is effectively saturated, expanding production just leads to inventory you can't sell (at least without taking a loss). So hiring more or better talent becomes a waste and having better tools does too.
Another alternative is the money could be given away. Companies do this to some extent but normally relatively small amounts compared to their profits at the level needed for good press or good relations in their local community. After a certain point giving more doesn't have much impact on a company's reputation. And given that companies operate in theory for the benefit of their shareholders, giving more than what is needed for these press and relationship benefits is against shareholder interests.
Companies could also pay more to the government but that gets even less good press than giving to charity so companies would prefer to avoid that too.
They could just sit on the money until such a time that it can be used for some investment the company could handle, but given that inflation is pretty much universal (since central banks all try their hardest to avoid deflation), that money is just losing value over time, not exactly something shareholders want to see. In essence having it sit around would be forcing shareholders into a larger cash position than they actually want to be in, since part of their stock just becomes unproductive cash.
So just giving the cash to investors becomes the most shareholder-friendly move. It's telling investors "hey, we've got more money than we can use. So you go use it however you want to do so." Dividends and buybacks both accomplish this but through somewhat different means. Dividends do it by just giving all investors cash equally for each share they own. The negative of this however is that not all investors want to get cash on the company's schedule and would prefer to just have the stock value be higher until they liquidate the holding on their timeframe. Buybacks help that problem by giving more opportunity for investors to deliberately self select who would like to turn their holdings into cash when the buyback is happening.
So in terms of why the company is giving cash to investors: that's because profits exceed the growth potential of other forms of spending the money. And why stock buybacks is because it allows more self-selection of investors who want to liquidate all/part of their holdings compared to a dividend. I hope that makes sense!
underrated channel, keep up the good work dad
very informative! Thank you
Nobody:
ECB: if we just buy our own bonds we make money!
@@thibaultlibat368 The thing is, the ECB is yet to use it's money printer
@@thibaultlibat368 What I undestand @Sam mule is trying to say is that the central banks doesn't buy back bonds from individual investors, instead they buy the bonds from institutional investors, and those institutional investors use that money to buy stocks. In short, what they are doing is pushing higher the stock prices and not the prices of goods like food or housing, so they don't create inflation.
Not only that you need deflation in order for your negative yield to still be profitable over time, but it is mandatory that the average inflation rate from the moment you buy the bond until its maturity date, or until you sell it - if you sell it at par value - situates itself below the yield. It's like you have a barrel with water siting in the sun; the water flux lost due to evaporation being the inflation rate (i.e. how much substance you lose), and a hose which supplies the containment with water is your yield. It is only obvious that if more water is supplied to the barrel than it's being evaporated, then the net water volume will increase.
Really like your videos!
Another excellent video!
The only growth that Bonds have is collecting the dividends from it, especially if the stock pays a monthly dividend.
Great explanation !
PLEASE do another video on a debt crisis, maybe just an economic crisis, or even a hyper inflation accident, you don't need AS good animation as the greece video, but I loved that video so much, I don't know why, but... yeah.
Great explanation
Keep the videos up 😀
@The Plain Bagel / unrelated question but what is the background music you use if you care to share, I’m really grooving with it while your explaining things lol
In some countries wealthy people can buy bonds even if they are negative and they would be safer, think of it like this, in the US checking accounts are considered safe because they are to an extent protected by FDIC, imagine a country where the economy is awful and there is no equivalent to FDIC protection and the person has a huge amount of cash to protect, then they might resort to buying negative yield bonds because they’re technically safer
In theory if they are so wealthy, can't they take their money to a safer country? That's how the wealthy of China take their money out of China, they use Macao as a loop hole of China's limit to how much currency you can take out of the country. There aren't many harder countries to escape your money from, apart from North Korea, so I don't see why they wouldn't just leave.
Running cash and Bond as assets two different things , negative rate bond means an asset for some businessman, investor never buys it , for example black money hiding idea boost Bitcoin , peoples who invested in start they had hided money they had no way to use it but when they invest they never thought for profit but for hiding
Can you do a video on equity valuation?
Thank you.
This is the only video that explains it properly
So i have a question, is it possible that Gov'ts could use these negative bonds to in a way pay back personal debts.
So an example being. The US debt is about 26-27 Trillion. If the govt starts paying out bonds which are in the negative and allow investors to in a way make money by selling the bonds between each other. Wouldn't that allow the gov't to have less of a strain on monetary payouts through these bonds and if they saved on the occasion. Be able to catch up the older bonds which had positive rates and them personally paying out more to private investors. If i remember correctly the US debt has about 70-80% owned to itself and while bonds are not really a big portion of that personal debt it would set a precedent for combating personal debt.
Yes, Trump has pushed for the Federal Reserve to start buying US Treasuries at negative interest rates recently. It would mean that the US debt would get smaller the more it borrowed. However, the Fed has only set interest rates at very small, but still positive, interest rates.
Bingo! There's the smart cookie. Negative yields are inevitable
@@tylerpeterson4726 Well at least there is something, maybe we could see something when Trump is re elected. Economically speaking he's done fairly well aside from the forced stimulus bills. Forced being the price tag since the democratic side wanted to block and "allocate" more to different stuff that didnt really need it. But Russia announced a cure so it shouldn't be long before ours gets finished so we'll see how things go
Surely each of the four points can be met with a normal positive yield bond? What's the positive of buying negative yield over positive yield?
Yeah, going into negative interest rates is a harsh mistake. We will come to regret this in 25 years.
It's not gonna take 25 years...
At what exchange can I buy your negative interest rate plain bagel bonds?
I've read a story where a wealthy man pledged their assets instead of paying the banks storage fees, as the payment for pledge is lower than storage fees, effectively lowering storage cost.
Currency crashes, like betting that the Euro will be replaced with e.g. Deutsch Mark is also a valid reason (in the timeframe of the bond).
Where do we buy your negative yield bond? Thanks
option 5, you're not focused on gaining money, just not losing so much money so fast
have you thought about doing a video on low/zero commission trading sites like etoro, robinhood, revolut etc?
Aren't zero commissions kind of an industry-standard now? Even Fidelity and TD Ameritrade don't charge commissions anymore. Correct me if wrong though
Karl Wheeler I agree, I was thinking more about his views on how the easy access apps like robinhood allow any teenager to throw money at their favourite companies (Tesla etc) with no knowledge of the risks
Im gonna issue some 50 year bonds at -2%
Is dividend capturing in the stock market worth it?
Hej @theplainbagel. Can you make an update on the bonds, inverted curve and the current fear of recession? Thanka
And it makes me wonder... Would it be smart to sell negative yield bonds short ?
Can you make a video about it?
I thought the mian reason would be that the ones buying the bonds can get the money from the central bank at an even more negative yield.
If the argument is ‘negative yield bonds cost less than the bank’, why wouldn’t you buy gold/silver?
And how much is it going to cost me to safely store that gold?
That is certainly a strategy employed by some, but bonds I believe are more stable in their price considering their defined financial benefit. Gold and other precious metals can succumb to speculative rallies and crashes.
Can I do this with my credit card balance?
Need help deciding whether I should purchase a negative yield bond or set my money on fire. Asking for a friend.
So if you bought a bunch of positive yield bonds in the USA say a couple of years ago, you actually have a good chance of making a decent return when yields become negative. Is that right?
If you already hold the bonds, then yes you would want the yields to turn negative, because really it just means that the bond you bought when it was profitable is now selling for more than it's worth!
Would buying TIPS now be a good strategy to hedge against potential hyperinflation?
it's a puzzle piece in a portfolio and the vacuum cleaner ECB raises the demand
thus Germany's bonds could be seen as a security in a portfolio
I can easily see insurance companies and pension funds buying them in some situations
How do individual buy a bond?
I'm currently selling a negative yield bond
Face value = $0
Price = $1000
I swear it'll go higher in price
Here from COFFEE ZILLA.
Were they negative yields during the great depression?
I think negative yields are somewhat new. I think they were first introduced after the 2008 financial crisis
Yes they are part of modern economy school.
Hey you didn't leave a link to the video in the description >:(
Whoops, sorry! It's fixed now
@@ThePlainBagel No problem! Absolutely love your videos btw!
You don't have any time stamps on this video.
You can add tags into timeline itself no need for it to be in description
So let’s say you bought a 1000 dollar government bond for 10 years. If it is 1% negative yield, you would end up receiving 1000-1000*1%*10=900 from the government after 10 years. Do I understand it correctly?
Great content, but cut or change the background music - very distracting.
Reason #2 makes no sense.
They would just buy a Positive Yielding Bond.
if you live in a county where the money gets les worth you will make money when the the euro you get back from german bons is getting more worth then your lokal money.
I'll just stick to my stonks.
Make a video on bill ackman
where can i buy the plain bagel bond, Im @#$%^ interested !!!! Take my Money!
damn your acting is getting better ahahah
Why do bond values increase when interest rate goes down?
Because the Bond was priced with the old interest rate in mind but the discrepancy between the real coupon yield and the real interest rate decreased, thus increasing the value of the bond by that amount
I would add to Primo’s explanation that if you have two bonds, one with -1% yield and the other with -2% yield you probably be willing to pay a little more for the one that deducts less money from the face value of the bond. So you pay more for the -1% bond compare to the one with -2% yield.
Maybe I am economically illiterate, but why is deflation always presented as a problem.
We as consumers are able to purchase more for less. I am aware that inflation while increasing the price of assets also eats away at savings.
I feel that rather than worrying about the amount of money in circulation we should be more concerned about the purchasing power of the money.
Deflationary spirals can be extremely dangerous. Think, if consumers experience declining prices, then behavior changes by putting off purchases. For example, if you are in the market to purchase a washing machine, you may put off buying it. In turn, the company producing the machine experiences decreasing revenue streams, contracts, and is then forced to layoff workers. In essence, deflating prices significantly alter consumption paths and behaviors in the short-term and disincentives economic growth.
Exporters cannot sell more of their products. In Canada the exports are mostly minerals and petrochemicals.
@@StuckInOhio10 I think I get what you are saying. But what if, changing consumer behavior is just people becoming more discerning of their needs vs wants.
I am more likely to put off a new washing machine if it is just a desired upgrade than a needed replacement. I can see this as the market forcing a reallocation of resources to finding a new equilibrium.
@@Afterlifesinner Think about a time when all of a sudden, people become more cognizant of needs vs. wants. What time is that in economic terms? It's a recession, isn't it? People start thinking like that because they have lost their job or money is tight so demand falls.
To clarify the above, there is a "good" deflation, and a "bad" deflation. If productivity grows and items become cheaper, while wages are maintained, that is a good deflation. Your money is worth more because items have gotten cheaper. Nominal wages might not have changed, but real wages have gone up.
The problem is, people don't see it that way. Me giving you a 3% wage when inflation is 3% feels better than me giving you a 0% wage when the inflation rate is -1%. It just does. Even though you lost money. People are less willing to adjust to market conditions in a deflationary environment. Which causes problems.
And this feeling is what central banks manipulate (as well as other things), which leads into "bad" deflation. People take out loans in nominal terms. I take a $1000 loan. That value grows on its own, without an interest rate, so unless I convince the lender to offer a negative rate, I'm screwed. Who leads out money in that situation? If no one is lending, the money in circulation declines, causing fewer people to lend, causing etc etc etc ... which can be bad!
So its either some massive productivity boom, which is good, or a credit tightening, which is bad.
I am sorry, but your way to explain complex financial topics gives me a man-crush on you
Why not just withdraw all your money from that bank as paper cash and close the account? A better investment would literally be to keep the paper money under your mattress.
one should then rather keep cash below the pillow...
okay this might make sense for banks who will face alot of cost to store cash but why would the average joe not just hold all his money in physical cash in a deflationary economy. ik ik this is much worse for the economy. another question from this . why won't people (i mean the avrage person not somebody with millions that cant do this , i mean ppl with like 10k savings) hold most of their money in physical cash in countries with negative interest rates on bank deposits?
Mattress economy, just like what great grandpop did
In a deflationary scenario the average Joe will be better off by holding the cash in hand or under the mattress, because in a deflation you can buy more stuff with the same amount of money in the future. But, you will have to asume the risk that some can steal your cash and you will lose it all.
Both cash and bonds do well in a deflationary period, one is just slightly more volatile than the other. It's pretty much like asking why would one buy silver when they could buy gold. But then again, the average Joe's don't diversify. They usually spend it all on TVs and cocktails
watch your video fantastic LIKE
You Don't Borrow Money
You Put Yourself Into Debt Sevratude .
Best Done As A Business Entity .
Are you cfa level 3 ?
Yes I have the full designation :)
@@ThePlainBagel im doing my bachelor's in commerce and after that willing to do cfa L1 will it help me to get in investment banking ?
@@WayfarerAj I definitely think it will! I'm not an investment banker myself, but the CFA for analysts is basically a must have so I imagine it would be helpful to have for investment bankers
@@ThePlainBagel thanx for your reply it motivates a lot 😊
10:18 is that a promise? hehe, In ten years you will regrett this ;)
number 5 your the fed
Further evidence that our entire monetary system is hopeless bankrupt when there are trillions in negative yielding debt, even in nominal terms, never mind real terms.
Makes me bullish on Bitcoin.
Happy Friday everyone! Visit www.squarespace.com/theplainbagel to save 10% off your first purchase of a website or domain using code THEPLAINBAGEL.
Germany still owe me for my 1916 bonds!!!!
such a sad story to see this exist
I'm more about just buying Tesla and Apple stocks 😎
Just make sure u have ur stop losses set
Google “Financial Repression” - explains negative rates on government debt
To summarize the reasons for holding negative bonds are completely insane.