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Good Luck ‘Keeping Your Head Above Water’: Almost Nothing Yields More Than 1% Across The Pond
One of the most interesting things about interacting with the general investing public by way of writing for public consumption is how often I'm reminded that "average" (whatever that means) investors aren't generally well apprised of key market dynamics.
I use the word "interesting", because "surprising" wouldn't work. Regular people (whether investors or otherwise) aren't very inquisitive and, thanks to the fact that we've become a society that everywhere and always eschews real analysis and
While I’m aware of negative yields I can’t get my brain around it. I will gladly accept negative interest rates for anyone to have the privilege of loaning me any number of trillions for any term
and as a heavily US oriented investor I’m not sure how negative yields in Europe really impact me, other than to possible drive up the value of my domestic investments
There are two factors that those twitter comments don’t grasp
1) The ECB doesn’t buy European debt according to a weighted average of countries’ debt on the total of the eurozone debt. The percentages are defined mainly according to the GDP weight. The ECB has to hold 24% of its Government bonds in German bonds. This compares to 17% of holdings in Italian bonds. The German debt is 2.1 Trn € vs 2.3 Trn € of Italy. If you make 0.24 * 2.1Trn you get 517bn €. Make also 0.17 * 2.3Trn and you get 370 bn €. The ECB stock of German bund is 40% higher than Italian BTP. The bid of ECB is more on bunds than BTPs.
2) People forget that it’s a yield. Negative yield is what you get if you keep bunds till redemption. Since bunds are issued above par (above 100), the yield turns out to be negative. But as concerns the cash flows, investors who buy bunds aren’t getting a negative return immediately, because the coupons are positive. So they get a positive flow for 9.5 years and then on the day of redemption they take a loss, and this makes it for a total negative yield. It’s written nowhere that those investors will really keep those bunds till expiration. Most of them probably purchase them with the idea of reselling them before redemption. One day we will see a big drop because I guess many will try to get out before the final 6-12 months.
This was a good relevant post…. I probably question the use of the word necessitated in paragraph four. though. What happens when by purposeful intent the Economic cycles that have governed past markets for it seems at least our lifetimes are banned then at some point there is little left to do to salvage the mess we have made. Then like an angry child maybe we take the puzzle and throw all the pieces on the floor and in a tantrum walk away. The question really becomes what the extent of the damage has become and what might be the ultimate solution… History resolves this riddle but it may not be a soft landing!!!