Bond rates

WolfeTone

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@joe sod that is a bit of a mind-bender but if understand correctly the critical factor here is time?

That is all because of negative interest rates.

Bear with me a little see if I can figure this out.

Ordinarily my €100 will have less purchasing power in 5yrs time than it does today. To protect against that I need a positive interest rate to maintain its purchasing power, say 3%, or €103 in 5yrs time.
But if I'm being offered a negative interest rate, say - 0.10% it means my €100 will have purchasing power of €99.90c in 5yrs time.
And investors think this is value? Meaning they think there is a real risk €100 will actually be worth less than €99.90 so that is why they are buying bonds with negative yields?
Is this not a deflationary trap?
 

WolfeTone

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Danes get 20yr 0% fixed mortgage

"Denmark has a so-called pass-through system in which mortgages are directly tied to the covered bonds used to fund the loans. Lenders act as brokers between borrowers and investors, generating income from fees, not interest rates. Borrowers get the coupon rate, though the effective cost is generally a bit higher because bonds rarely sell at par."

Two things, another illustration of the demise of retail banking?

More importantly, what does 0% fixed over 20yrs signify about the value of money?
 

NoRegretsCoyote

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2,009
[And investors think this is value? Meaning they think there is a real risk €100 will actually be worth less than €99.90 so that is why they are buying bonds with negative yields?
Not necessarily. It's just that the demand for safe assets exceeds supply.

You can adjust bonds for inflation. These bonds adjusted for inflation have been negative the last year or so in the US. (Longer in Europe).

This pretty much means that you are giving the US government $100 dollars today and in 2031 they will give you back whatever $90 would have bought in 2021.

 

WolfeTone

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663
$90 adjusted for inflation.
So in 2031, for my $100 today, I will get $90 in return adjusted for inflation? But because we don't know what the inflation rate will be, it could mean a return of $90, $95, $100, $110 etc... depending on the inflation rate over the period 2021 to 2031?

But in essence, I am selling my $100 today in 2021 for guaranteed purchasing power of $90 (adjusted for inflation) in 2031?
 

RedOnion

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But in essence, I am selling my $100 today in 2021 for guaranteed purchasing power of $90 (adjusted for inflation) in 2031?
Pretty much.

So if you imagine people investing in long term bonds for their pension, etc, they're putting in 100 quid to get back 90 in 'todays money' in 10 years times.
 

WolfeTone

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663
they're putting in 100 quid to get back 90 in 'todays money' in 10 years times.
Yes, which on the face of it looks like a bad deal, unless you are anticipating with a some deal of reasoning that your $100 today could actually have less purchasing power than $90 in 2031, if say you left it on a deposit savings account?
 

NoRegretsCoyote

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Yes, which on the face of it looks like a bad deal, unless you are anticipating with a some deal of reasoning that your $100 today could actually have less purchasing power than $90 in 2031, if say you left it on a deposit savings account?
Perhaps.

An inflation-protected bond is like insurance. No matter what happens to inflation your purchasing power at the end is guaranteed.
 

joe sod

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Yes, which on the face of it looks like a bad deal, unless you are anticipating with a some deal of reasoning that your $100 today could actually have less purchasing power than $90 in 2031, if say you left it on a deposit savings account?
but because most the "demand" for these bonds is created by the central banks "buying" them with newly created money and now making the interest rate go more and more negative the bonds issued two years and 5 years ago are worth more because they actually have a positive interest rate or even just a less negative interest rate. Therefore the value of bond funds generally rises because they have these older bonds. If anything happens though that makes interest rates go back up again even a little bit then the great game is up. Then the older bonds are negative but the newly issued ones have a higher interest rate, then the rush to get out of these bond funds that have all these negatively yielding bonds with severe consequences for pension funds etc. Of course the markets are betting that the central banks can't allow this to happen and this has basically been a one way bet since the 1980s . Central banks are the ones that caused negative interest rates because they couldn't allow interest rates to stop at 0 because to maintain the demand for today's bonds that yield 0 must only be because tomorrow's will be negative
 

NoRegretsCoyote

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Central banks are the ones that caused negative interest rates

Interest rates are ultimately determined by the supply and demand for loanable funds.

Central banks do a lot in the short run but they can't alter structural factors like an ageing population, productivity growth,etc.
 

RedOnion

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Yes, which on the face of it looks like a bad deal, unless you are anticipating with a some deal of reasoning that your $100 today could actually have less purchasing power than $90 in 2031, if say you left it on a deposit savings account?
Yes, kind of. If you look at the difference in the yield between these inflation linked bonds, and normal treasury bonds, it'll give an indication of where the market expectation of inflation is for the next 10 years.
 
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