What Goose Egg Bound?
German bond yields plough negative, every bit reported inwards the Wall Street Journal.
Negative involvement rates are a big puzzle. Easy stories immature adult woman the point: "flight to quality," "need for collateral," etc. Those stories don't explicate why bonds are worth to a greater extent than than money. There's no to a greater extent than lineament or ameliorate collateral than cash!
So why would anyone endure a negative charge per unit of measurement on regime bonds when they tin lucifer cash instead?
For unopen to of us it mightiness brand sense. Cash is clunky, unsafe too expensive to seat nether a mattress. Many banks straight off accuse for the privilege of depositing. So an private mightiness prefer a rattling slightly overpriced regime bond to cash.
But a banking concern has a ameliorate option. Why non but lucifer reserves? Reserves are similar cash, too every bit rubber too liquid (more so) than regime bonds. I mightiness bring guessed that exclusively people were buying these bonds. It seems I'm incorrect (unconfirmed rumor) -- banks are buying too belongings the bonds.
So why would a banking concern lucifer a bond at negative involvement charge per unit of measurement rather than lucifer reserves? Sometimes in that place are arcane technical, accounting or regulatory reasons, but too thus far nobody I've talked to has identified i here.
The best storey I've heard too thus far, suggested past times i of the smart students inwards my MBA class, is this: It's a bet on Federal Republic of Federal Republic of Germany leaving the Euro. If Federal Republic of Federal Republic of Germany leaves the Euro, it is probable to redenominate its bonds too and thus pay off inwards novel DM. The ECB is probable to instruct out reserves inwards Euros. So, if y'all desire an property that volition pay off inwards novel DM after Federal Republic of Federal Republic of Germany leaves the Euro, High German regime bonds are a adept bet.
That storey pierces the goose egg bound. There actually is no limit to how depression bond yields tin instruct if y'all intend bonds mightiness hold out paid off inwards a ameliorate currency than the i y'all tin materials inwards your mattress.
It sounds a lilliputian outlandish, too the chances that Federal Republic of Federal Republic of Germany leaves the Euro inwards vi months seems pretty depression to me. Still, it's a overnice story. Does anyone bring a ameliorate one? Remember, y'all can't answer why bonds await too thus adept -- y'all bring to explicate why bonds are a ameliorate property than reserves, for a High German banking concern to hold!
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| Source: Wall Street Journal |
Negative involvement rates are a big puzzle. Easy stories immature adult woman the point: "flight to quality," "need for collateral," etc. Those stories don't explicate why bonds are worth to a greater extent than than money. There's no to a greater extent than lineament or ameliorate collateral than cash!
So why would anyone endure a negative charge per unit of measurement on regime bonds when they tin lucifer cash instead?
For unopen to of us it mightiness brand sense. Cash is clunky, unsafe too expensive to seat nether a mattress. Many banks straight off accuse for the privilege of depositing. So an private mightiness prefer a rattling slightly overpriced regime bond to cash.
But a banking concern has a ameliorate option. Why non but lucifer reserves? Reserves are similar cash, too every bit rubber too liquid (more so) than regime bonds. I mightiness bring guessed that exclusively people were buying these bonds. It seems I'm incorrect (unconfirmed rumor) -- banks are buying too belongings the bonds.
So why would a banking concern lucifer a bond at negative involvement charge per unit of measurement rather than lucifer reserves? Sometimes in that place are arcane technical, accounting or regulatory reasons, but too thus far nobody I've talked to has identified i here.
The best storey I've heard too thus far, suggested past times i of the smart students inwards my MBA class, is this: It's a bet on Federal Republic of Federal Republic of Germany leaving the Euro. If Federal Republic of Federal Republic of Germany leaves the Euro, it is probable to redenominate its bonds too and thus pay off inwards novel DM. The ECB is probable to instruct out reserves inwards Euros. So, if y'all desire an property that volition pay off inwards novel DM after Federal Republic of Federal Republic of Germany leaves the Euro, High German regime bonds are a adept bet.
That storey pierces the goose egg bound. There actually is no limit to how depression bond yields tin instruct if y'all intend bonds mightiness hold out paid off inwards a ameliorate currency than the i y'all tin materials inwards your mattress.
It sounds a lilliputian outlandish, too the chances that Federal Republic of Federal Republic of Germany leaves the Euro inwards vi months seems pretty depression to me. Still, it's a overnice story. Does anyone bring a ameliorate one? Remember, y'all can't answer why bonds await too thus adept -- y'all bring to explicate why bonds are a ameliorate property than reserves, for a High German banking concern to hold!
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