Negative Yielding Bonds Turn into Punishment Bonds

After peak negative-yield-absurdity in August, bond prices fell – the “bond bloodbath” – and the mountain of bonds with negative yields has plunged by $5 Trillion, or by 30%, despite rate cuts.

The 10-year US Treasury yield rose on Friday to 1.94%. That’s still very low, and below inflation as measured by core CPI (2.4%), but it’s up nearly 50 basis points from the lows at the end of August. During this time, the Fed has cut its interest rate target twice, by a total of 50 basis points, and short-term Treasury yields have fallen by about that much. With the one-month yield now down to 1.56% and the 10-year yield up at 1.94%, the yield curve has un-inverted and steepened.

US debt isn’t the only place where long-term yields have been rising despite major central banks’ action or at least verbiage on the rate-cut and QE side. The rise in long-term yields despite ultra-low or negative shorter-term yields has reverberated around much of the world.

When yields rise, bond prices fall, and what has been going on has been described as “bond bloodbath.” That term may be pushing it, considering what a real bond bloodbath could look like.

But for holders of long-term bonds that they bought with negative yields, it is a very unpleasant experience when prices of those negative-yielding bonds also drop. And that’s what they’re facing now.

In the Eurozone, where the ECB in September cut its deposit rate deeper into the negative, long-term yields have risen across the board.

The German 10-year yield rose to -0.26% on Friday, up nearly 50 basis points from the low at the end of August. The 20-year yield became positive (0.03%), and it has pushed the 30-year yield further into the positive.

Germany’s 30-year bonds are infamous for the government’s efforts to sell them at a negative yield of -0.11% on August 21. The bonds were offered with a 0% coupon – so no interest payments for 30 years – and at a premium, in order to achieve the negative yield of -0.11%. This effort that mostly failed: €2 billion of these insane bonds were offered, but there weren’t enough brain-dead investors, and those that the government could round up bought only €824 million. That day marked peak-negative-yield absurdity.

The French 10-year yield transitioned into the positive on Thursday for the first time since July and closed on Friday in the positive (+0.023%), up almost 50 basis points from -0.45% at the end of August.

The Spanish 10-year yield which had come close to zero at the end of August rose to 0.39% by Friday.

The Belgian 10-year yield, which had dropped as low as -0.38% at the end of August, turned positive on Thursday for the first time since July and closed on Friday with a yield of 0.02%, up 40 basis points from August.

The Italian 10-year yield, which never made it into the negative despite Draghi’s best efforts, rose 30 basis points from 0.82% in early September to 1.18% on Friday.

In Switzerland – the first country to actually sell new 10-year bonds with a negative yield in April 2015 – the 10-year yield had bottomed out at -1.10% on August 16, and has since soared 70 basis points to -0.40%. Those are true punishment bonds for folks who bought them in mid-August. For those buyers, the annual yield will be -1.1% until they get rid of those bonds, but now the bonds are also losing value, and if those August buyers want to sell the bonds, they will also have a capital loss.

In Japan – the second largest government bond market in the world, if you can call it a “market” though it’s totally controlled and dominated by the Bank of Japan – the 10-year yield has risen from -0.29% at the end of August to -0.06% now.

And this has played out across much of the negative-yield world, where short-term yields remain negative, but long-term yields have risen as bond prices have fallen.

The mountainous amount of negative yielding debt had peaked at a mind-bending $17.03 trillion on August 29, but has since then plunged by $5 trillion, or by 30%, to $11.94 trillion on Friday, still a huge gigantic amount of sheer absurdity, but the lowest amount since June, according to the BNYDMVU Index, posted by Bloomberg’s Lisa Abramowicz (click to enlarge):

This comes at a time when investors are having to absorb a flood of government and corporate debt coming on the market in the US, Europe, and elsewhere, looking for buyers.

The ECB, the Bank of Japan, and the Swiss National Bank have already admitted that negative interest rates weaken banks and have recently offered deals to banks to “mitigate” those destructive effects. Bank stocks in Europe and Japan are trading in the realm where they’d traded decades ago.

But negative interest rates or very low interest rates have an even more destructive impact on the real economy: They not only create asset bubbles, and all the risks that come with them, but they also distort or eliminate the most important factor in economic decision making – the pricing of risk. Here is the transcript from my podcast, How Negative Interest Rates Screw up the Economy

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  146 comments for “Negative Yielding Bonds Turn into Punishment Bonds

  1. David Hall says:

    Negative interest rate bonds do not interest me any more than investing in tulip bulbs that are perishable and not a consumer staple.

    In the 1630’s the Dutch bid the price of collectable tulip bulbs into the thousands of dollars per bulb range until one day someone thought, “This is insanity.” The price of tulip bulbs started to fall until people did not want to buy any of them as people who had invested in tulip bulbs lost fortunes. They are edible, but a potato is of better value.

    • raxadian says:

      There was an episode of a live action comedy series that had the kids lose a fortune (for their age) in potatoes.

      Anyway, once all treasuries are on the positive, hopefully thousands of unicorn zombies will finally drop dead for good.

      • MCH says:

        How dare you…. what would the state of CA do without the taxes from unicorn zombie money. It is inequality at its worst, stop trying to bring sense to the world so Ca can collect stock taxes from the rich while complaining about the income inequality.

      • John Taylor says:

        There was an episode on that old 90s sitcom “Saved by the Bell” where a class investment project is changed into speculation on potato futures which seems to be making money until they find that holding the contract to the end means they have to take delivery and a bunch of money is lost. I bet the live action series was referencing this episode.

        • sierra7 says:

          John Taylor:
          Just think if it was “futures” of chicken manure!!!! LOL!!!!
          Who’s gonna take “delivery”???????

    • ItsCollateralBaby says:

      They would have interested you if you were in the business of lending them out to people who would use it as collateral…

    • MC01 says:

      Funny thing is if you actually had one of the most prized tulips from the 1630’s like the Semper Augustus, the Viceroy or the Admiral van der Eijck you would have plant collectors lined at your door to buy them at extravagant prices.

      I know of one commercial grower in The Netherlands who claims to be still growing a small number of genuine varieties from the Tulipmania, but the most sought after cultivars, those fetching thousands of guilders in the days, were invariably of the “broken” variety, meaning the bulbs were infected with the Tulip Breaking Virus which resulted in their peculiar coloring. The Tulip Breaking Virus, however, has a problem: most strains will end up slowly killing the host, so most of those ultra-expensive bulbs were actually even more short-lived than florists (tulip bulb speculators) thought.

      Had I opted for agri sciences instead of chemistry I could tell you more, but I seem to recall the oldest broken tulips available nowadays are from the end of the XVIII century, and they stuck around so long merely because they are infected by a mutant strain of Tulip Breaking Virus which is considered benign, or harmless. Broken tulips from the Tulipmania are long gone, regardless of what some folks say to feather their nests. ;-)
      Modern tulips with a “broken” pattern were actually created using selective breeding, so they are far stabler and longer-lived than the original article. These include the much talked about Wakefield Flame, a perfect copy of the Semper Augustus which has had purists up in arms since its introduction.

    • medial axis says:

      Yes, best to avoid tulip bulbs like the plague. I much prefer bitcoin myself, and much more than anything else I see at present. Odd thing is, my brother, younger than me by 3 years, who’s into stock and shares just doesn’t get it. He cannot see the value in bitcoin. I think that’s because he’s trying to measure it using the same metrics he uses for shares. A bit like trying to measure the value of one of those newfangled automobiles using hands.

      • Mike Earussi says:

        I value Bitcoin for it’s entertainment, as I watch the suckers take a bath.

      • The U.S. stock market today is a pure 100 percent ponzi reminiscent of the days of the tulip bulb craze.

      • Vespa P200E says:

        IMHO – all digital bitcoin is the MODERN day once prized tulip bulbs. Created out of thin “air” and PT Barnum was right about suckers born every minute.

    • Old-school says:

      Maybe the way to look at it is to turn the situation upside down. With stocks, bonds, housing at all time highs and up 2X – 5X maybe the thing to do is sell it all and go to t-bills. Even if they repress you 2% per year you are never going to give it all back.

      • GC says:

        +1… nothing wrong with taking profits off the table.

      • VT says:

        Too early,we still have massive melt ups and hyper inflation before TPTB can’t manipulate the madness and it really crashes. Putting some in gold/silver now is a good idea as insurance against idiocy.

    • VT says:

      At least tulips have a real value,the bursting of the bubble happened when a merchants life savings that was pledged as collateral for merchandise was accidentally eaten. Negative bonds are worth less than the paper they are written on and anyone who bought them should be punished

  2. Bobber says:

    Why aren’t populations in these European countries rioting in the streets? The people cannot earn a return on their savings. This does not seem like a trivial matter to me.

    Maybe people are OK with it because their stocks have gone up. But what happens when stocks go down and the savings rate is still zero or less? Will they riot then?

    The central banks are playing with fire. People need jobs AND savings, Ms. LaGarde.

    • andy says:

      Only stocks markets that have gone up are US amd India. And you get 8% interest on your savings in India (anecdotally).

      • Sammy Iyer says:

        Since Indian economic growth has turned negtive for the last 2 years, Indian central Bank has cut rates 0.25% each time for the last 5 interest setting meetings ! still One can get 7% interest on a 1 year FD in a reputed bank. But one has got to take notice of Rupee depreciation ! Imported inflltion is due to oil priced in $.(Indian Brent oil comes from middle east (always 10$ more than usa benchmark& never below $60/barrel when US sweet crue is 40-55)
        In 2003 I converted my $ savings to Indian ₹ @ 1$= ₹40 . Now 1$ =₹71₹ ( For comparison In 2003 1US$ =8 Reminbi (chinese yuan ) I lived in HongKong for a very long time)Now 1$=<7 Yuan (still stronger after 16 years)
        You are right only the unicorn stock market is at historic high . Real economy is in dumps . Manufacturing, Auto sales/production is down 10-30% . Real estate & over all Inflation in the last 15 years is high. Only people employed in USA/Multinationals are getting high salaries (as USA off shoring companies are terminating 70-100$k jobs in USA & paying $20k salary in India) rest of the population are suffering.
        As you mentioned Iam getting 7-8% Fixed deposit interest (well distibuted in many banks to avoid risk) & getting $10,000 ( ₹700,000) interest and living off comfortably in it .(No loans of any sort) For senior citizens first 550,000₹ (say $ 7500) no income tax

    • Lt says:

      Lagarde just this week regarding negative rates: “Would we not be in a situation today with much higher unemployment and a far lower growth rate, and isn’t it true that ultimately we have done the right thing to act in favor of jobs and of growth rather than the protection of savers?”

      They don’t care about the savers.

      • Wolf Richter says:


        They don’t care about jobs either because unemployment is now rising in Germany, despite or because of NIRP. All Draghi cared about was keeping Italy in the Eurozone. Hence NIRP and QE.

        • d says:

          “All Draghi cared about was keeping Italy in the Eurozone. Hence NIRP and QE.”


          Somehow I get a stronger and stronger feeling Legarde is there to be the fall girl.

          A bit like Theresa May, given a terminal hospital pass at the opening whistle, only to be kept on the field as long as possible, by self interested coaches.

        • Xabier says:

          Spot on, Wolf.

          I discussed this issue with a very wealthy Italian: some human sympathy, in fact, for the disastrous economic fall-out from being in the Eurozone as currently structured, ie the dreadful youth unemployment etc, but basically his line was :

          ‘I like the Euro, it works for me, the constant devaluations of the Lira days are something no one wealthy wants to return to, ever.’

          In this way, whole economies are trashed, and above all those at the bottom, who are left hopeless or having to leave if they can.

          There is a very dirty underbelly to the Eurozone, and getting dirtier: this results in a very poor outlook for political stability, although rather than dictators sweeping to power on a massive tide of discontent, we will simply see a ever-more fragmented and radicalized (Left and Right) electorate, leading to paralysis.

        • Dietmar says:

          Europeans won’t riot as long as their stomach is filled. Doesn’t matter if the food quality gets worse and it’s price rises. So far, only the French took to the streets. They keep Italy in the Union, because of TARGET2. If Italy tanks, Germany will follow. It’s credit towards Italy would fail miserably. The Italian citizens get squeezed like lemon. The government, or better it’s creditors are working hard to reduce cash payments, not just for tax purposes, but to move deeper into negative rates. Cash is in the way. It’s a crazy world here, most people haven’t realized, they have been turned into slaves. I think you guys in the US have to get the ball rolling. We are too stupid here. Greetings from Italy

      • Trinacria says:

        Lagarde reminds me of a lizard. Savers are the bed rock from which everything else flows. She and her predecessors and our FED have is “bass ackwards” on purpose… but when this game ends, truly gird your loins. No telling how long this freak show goes on, but now is the time to prepare, trimming back debt and living simply.

        • Old-school says:

          Draghi was there as a wall street banker to use all the financial engineering possible to kick the can. LaGarde is there as a politician to try get more cooperation on fiscal policy and financial consolidation to try to kick the can.

        • Unamused says:

          No telling how long this freak show goes on

          They can only kick the can down the road until they run out of road, and they can only inflate financial assets so long as they can sufficiently bleed the real economy.

          About six years, at most. Sooner if a major disaster causes the herd to stampede.

        • Mike Earussi says:

          Who needs savers when you have the printing press?

      • Wisdom Seeker says:

        They don’t care about economics as a science either. They’ve got unproven theory based on false assumptions, taken on faith, claiming that over the Long Term, higher interest rates imply higher unemployment. The data only show that to be the case in the short run and generally only in the case where rates are correlated with the supply of credit (e.g. gold standard era). There’s plenty of reason to believe that low rates are detrimental to growth in the long run, because they reduce the cost of malinvestment.

        I expect history will prove that over the Long Term, positive interest rates reward productive investment which raises standards of living for all, and discourage malinvestment. In which case Lagarde isn’t merely wrong, she’s got everything bassackwards.

      • Dennis says:

        So, she thinks sending millions of jobs to China, India, and Mexico is fine, for the U.S. She hasn’t said anything about that. I imagine Europe has done much the same.
        To counter that we can just lower interest rates and borrow money.
        How has that been working out for our economic growth? Or for Europe’s?

      • RepubAnon says:

        Throughout the 1980s, I recall noticing that the interest rate on passbook savings accounts was about 1-2 points lower than the inflation rate. It was only because inflation was running around 8%, while passbook savings was around 6%, that we didn’t see loud complaints about the 2% net negative interest rate.

        • Dale says:

          The 3-month treasury was mostly about 3% higher than CPI during that period.

          Speaks to the need for financial education classes for engineers.

        • V says:

          1980’s rates were double digit early on(deposit intetest was low) but had great investments in tax free munis’ that matured several years ago. Reagan bleed the US dry on giveaways to the rich while they were robbing banks and Jack Welsh was starting up the Great Offshoring to culminate in NAFTA.

    • fjcruiserdxb says:

      People in Europe are demonstrating. The Gilets Jaunes have been for almost a year. Not that it gets reported by the media. When Ms Lagarde says that it is more important to have a job rather than savings, we should really worry. Not only Europeans (except perhaps the Germans) no longer save, they also have no jobs.

      • Old-school says:

        LaGarde tipped her hand there as that is a weakness of central bankers. They don’t believe in real savings because they can conjure up false savings til they do too much and paint themselves in a corner.

      • timbers says:

        Slaves have jobs but I expect no savings and too many who worked in fuedalistic societies. I don’t think that commonality is for naught.

    • medial axis says:

      Return on savings? Here, in the UK, some can’t even earn a decent return on their labour.

    • Petunia says:

      People are not rioting in the streets yet, because in the Mediterranean countries, average people consider the govts irrelevant. As they feel the boot of repression their attitudes change.

    • Raymond Rogers says:

      Maybe they are content with being serfs. It’s not like Europe prizes individualism. It’s all about the state. In the US we are not far behind. Most people are ok with Google, Twitter, or YouTube telling them what is socially acceptable. A portion even wants the government to control more than ot already does.

      • sierra7 says:

        “Citizens” don’t riot until desperate. I’m sure there are regions of the world that they are desperate as some have always been.
        But, the “western” world hasn’t rebelled because they are not desperate……yet.
        Yes, we have millions of homeless.
        Yes, we have (here in the US) fractured the jobs market with lower pay jobs that forward looking are just a “zero”.
        We are propagandized to death on how good the economy is (depending on the election cycles).
        Retirees, savers are being squeezed; actually destroyed by the WS financial geniuses along with the Pols and the FED.
        But, we still have lots of “social supports” such as SS, unemployment insurance, workers comp, many, many programs to help feed and attempts to shelter the homeless; many other charitable organizations that also participate
        Until that basic support ceases we will not see “riots” in the streets even we wish the earthquake to begin.
        No, we are still “generally” too well off!
        As one who remembers the GD well there was no money. Local Bay Area farmers tried to sell 200# containers of cabbage, cauliflower etc. for 25c (cents) and no takers…….we haven’t gotten there……yet.
        We don’t see the long lines at soup kitchens.
        No, we are still too well off for revolt.
        Today we are awash in money.

    • VT says:

      Yellow vests in France,Brexiteers in UK,Dutch farmers blocking roads,Spain in open rebellion,German labor marches,Austria under siege to be forced to take illegals, are you not paying attention? From Sweden to South Africa to Hong Kong,from USA to Peru it is all a huge mess about the only stable places seem to be Panama and Iceland

  3. Tom Jones says:

    The obvious “solution” (sic) in USA and around the world is simply to devalue the currency thru debt monetization; which is happening. Of course pensioners, savers, retirees, workers, will lose everything while those dealing in financials or hard assets will ride it out ok. The real risk is going to be political as a large portion of the population get increasingly screwed. Unheavals and civil disorders and/or populists dictators or wars could be a result of the ensuing chaos.

    Political parties are unable to de-escalate their antagonisms enough tocome together to actually solve any of the countries real issues in a fair, equitable manner. Doesn’t look good.

    • JZ says:

      Elon Musk, going Mars with EV. Does this look good?

      We can tolerate any kind of debt and inequality as long as we can have something like Elon leading us.

      • Unamused says:

        Elon Musk, going Mars with EV.

        Musk is just indulging his ego. Humans will never colonise another planet because the practical difficulties are insurmountable.

  4. Bobber says:

    You know that cheap money has reached its limit when there is absolutely nothing to invest in, because any kind of boondoggle has already been pursued.

    When the economy bumps into this limit, interest rate reductions don’t work, and look out below. WeWork is a great example of how throwing cheap money at things doesn’t get you anywhere. I’m starting to see the end of this great central bank created bubble as companies like Uber deflate, and Amazon hits a wall.

    More and more people are deciding to delay investments and preserve their cash hoard until the bubble pops. Ask Warren Buffet.

    • Old-school says:

      I just read an article saying that Buffet basically has a hurdle rate of 10% before investing. It’s not a bad idea. You don’t have to take a risk if you can’t get a decent return.

      If I am pretty certain of the earnings outlook I use 3% over 10 year treasury. So like an electric utility I would like to see 5% div before investing.

  5. JPM was (one) bad actor in the Repo spike. They had the position that low yielding bonds are preferable to cash, (and more lower yielding bonds lie ahead). So daddy Fed threw T Bills into the mix? In order to protect Jr. from being blasted out of his position by rising (global) yields? “We will now await the catalyst for an inevitable bout of de-risking/deleveraging…. And near the top of my list of possible catalysts would be a surge in global yields.” Doug Noland’s CBB fits into this discussion. JPM deleveraging it’s tightly held bond holdings for cash would be a catalyst. You have to think that is first in the Fed’s thinking when they put up an open ended commitment..

  6. ZeroBond says:

    Hidden Intervention: Political Motivations Driving Fed Policy

    Monetary Policy Is Political

    What is the purpose of the Federal Reserve’s purchases? Yes, interest rates in the overnight lending market had risen. And, yes, the provision of liquidity appears to have stabilized rates in that market. We never entered crisis mode. Not even close. But that does not explain why the Federal Reserve chose this path to stabilize the overnight lending market. After all, it could have solely increased holdings of repurchase agreements or decreased holdings of reverse repurchase agreements without increasing holdings of Treasuries. This would have accomplished the same goal without the additional economic distortions in the Treasury market generated by the chosen intervention.

    One must wonder if Jerome Powell was seizing the opportunity to ease pressure from the current administration. As George Selgin has pointed out, the problem of Federal Reserve officials reducing the size of the balance sheet is a political one. The large balance sheet is not necessary to promote macroeconomic stability. It is necessary to keep interest rates low in sectors favored by Fed policy.

    The Federal Reserve is subsidizing the Treasury. The apparent trouble in overnight markets appears to have provided an excuse to quietly reengage in the now decade-old program of support. In the process, Powell has — for the first time during his tenure — increased the size of the Federal Reserve’s balance sheet.

    • timbers says:

      But it’s not QE and it’s not a U-Turn. That’s his story and he’s sticking to it.

      • SpiderPig says:

        “ Gold will flee from “their” currency zone to one where it is freely traded”

        This is basically what ended Breton Woods and the gold standard, culminating with the Nixon Shock. Attempting to manipulate the price of gold in dollar terms leads to arbitrage opportunities in overseas markets and causes gold reserves to be drawn down to every lower levels. Eventually the Germanys and Switzerlands exit the program unilaterally.

        Gold may be an inflation hedge, but it is not a magic rainbow to prosperity.

  7. ZeroBOnd says:

    Perpetual Public-Spending Stimulus

    As long as the Federal Reserve continues this practice of purchasing Treasuries and hiding the results of monetary expansion by sterilizing the resultant monetary expansion, it will enable excessive federal spending while leaving the public with little recourse. In turn, the federal government can avoid facing the consequences of fiscal irresponsibility.

    Resources are transferred to the government from the private sector as government borrowing is relatively cheap compared to private borrowing. The new monetary-fiscal arrangement may be promoting inefficient economic structure. Unless we assume that the federal government does a better job of choosing profitable investments than private investors in a competitive market, this policy will likely lead to lower levels of economic growth as government over-invests in some sectors at the cost of under-investment in other sectors.

    • timbers says:

      Huh? I don’t see a consistent spending problem overall. I suggest you Google federal spending by year. I do see a revenue problem. No doubt caused by all those tax cuts for the rich and tax freeloading corporations.

      • Raymond Rogers says:

        No spending problem? It’s not as if the US government takes in less revenue each year.

  8. DR DOOM says:

    The quality of collateral is going in the toilet in the repo market. In the the tri-party repo There is a clamoring to set up a government run “utility” to do the clearing . The main repo clearing banks, JPM and the Mellon bank are going to slide this off on the taxpayer when the fees of clearing ain’t worth the bad mojo of the garbage collateral they are clearing for the other two parties of the repo . Eventually The repo agreements that JPM and the MB are clearing will be roadkill and they ain’t going to be around to be asked questions when the roadkill starts stinking up The hallowed halls of Congress.

    • morticia says:

      I simply can’t understand why there can’t be two lines at REPO?

      One line for good collateral, another line for the trash. The good pays the low rates, and trash pays the high rate for risk.

      What’s happening now is Cantillon effect where good paper is hoarded and trash is taken to the REPO, of which the 500LB gorilla (JPM) doesn’t want.

      Of course don’t expect anything to change, as dis-information is the rule of law in the USA, and Trumpf is our ConMan in Chief. What I mean is not political, just a statement that whatever he say’s he means the opposite. No different than Alice in Wonderland. dTrumpf tariffs are just a means to collect taxes from Chinese imports to cover his tax decrease for rich patrons that put him in office. After all who is effected by goods imported from China heading to Walmart? Only the minions.

      Perhaps somebody wants the REPO market broken for good? This is where the last depression 2008 began, and the same players to boot.

      I’m not so sure that JPM gets to just pass this ‘trash’ on to the FED or UST, its clear when rates skyrockets to 10% in September that there were no buyers, which means there was no profit margin for risk.

      At some point the trash mountain becomes so big, so stinky, so ugly that even MA-FED, or BIS can’t touch it with a 10ft pole. This is the fear of JPM, and who wants to be the last man hold the bag of Feces?

      • Iamafan says:

        So where is this trash? Is it in General Collateral (about ten classes) on tri-pary or is it in specific or special bilateral repo.

        Time to get specific if we’re to understand quality of collateral.

        Since we’re talking mostly 3 kinds of Government securities in the Fed repo, I suppose that’s fine if not reused or rehypothecated.

    • DrRehypothication says:

      Any wonder why dealers wouldn’t be rushing to accept as collateral that of which they already lent out x times over…

    • Iamafan says:

      JPM is no longer a triparty repo clearing bank. I believe they quit in 2016. That leaves BNY Mellon as the only clearing bank.

      • DR DOOM says:

        Imafan: For what it is worth Investopedia lists JPM as a clearing bank as of Oct 2019. JPM can’t stop clearing the repos for the credit markets unless they pass it off to a government “utility” . JPM is a creature of the fed and is given legal immunity for being a creature. Watch the credit markets , this is where the next collapse will be , The stock market will follow. Be nervous,very nervous if serious talk about a government clearing “utility” surfaces for the credit markets . Corporate America has been feasting on free money . Dow 35000 is a possibility because the Fed is going to keep this credit market going till it collapses or WAR. Just like the Blues,it’s a old true story.

  9. Petunia says:

    I just checked to see if they have a calculator to price a negative rate bond and couldn’t find one that works with negative rates. If you look at the formula which is a summation of cash flows to calculate price. The formula for a bond yielding -1% prices at -$10 in the first period. Then the formula degenerates into an undefined calculation.

    • Ed C says:

      In the engineering / software world they have imaginary numbers and NaN’s — not a number. Seems like the financial geniuses have created imaginary returns in the bond market. It is all insane.

      • Petunia says:

        When you price an MBS, you get to a point where the cash flows disappear and the rest is an imaginary return. The graph starts out as a pie with past and future payments and lands up as a donut with a big hole in the middle.

      • Ed C says:

        BTW sqrt of – 1 = i; i being magical imaginary number. Don’t ask me to explain — too many years since graduation but this ‘i’ component is very useful, believe it or not.

        • medial axis says:

          Yes, Id’d say very very useful. For instance, they reduce the analysis of alternating circuits (electrical) pretty much down to that of DC circuits. More commonly, they’re known as complex numbers. Mind you, they’re not half so complex as quaternions, which have 4 components!

          BTW, sqrt(-1) = i or -i, there’s always two solutions to a quadratic, albeit sometimes they’re the same number!

        • Em says:

          They addopted it for i-phone, i-pad, i-everything :)
          (In algebra is ‘i’ and in electrical engineering we call the same ‘j’)

        • Petunia says:

          Imaginary “i” is simply the point at which a trend line changes direction radically. A steadily sloping up trending line which falls dramatically down in a straight line is a representation of “i.”

  10. andy says:

    US bond funds are up 6-8% YTD. Let Europeans eat cake.

    • Wolf Richter says:


      Since the end of August, the only US corporate bonds that have risen in price are junk bonds — and only a tiny bit. Everything else has fallen in price. So check bond fund returns starting Sep 1. That’s the time frame of this article. As pointed out, the end of August was peak insanity for bonds.

      • andy says:

        Yes Wolf, totally. Another peak insanity was when some online banks offered 4% 5-year CD like a year ago or so.

        • Wolf Richter says:

          I didn’t see any non-callable 4% CDs a year ago. Must have missed them. I did see some callable 3.5% CDs, which have now been called :-]

        • GrasshopperMeNot says:

          Wolf – I found some 5 year CDs at 3.1% non-callable, and some 10 year at 3.6% non-callable about a year ago. GS and WF both got a little hungry for capital for a short while, and both had non-callable FDIC insured CDs at almost too good to be true rates. Previous CD purchase was in 2008, 4.4% on a 1 year. I have missed out on about $400,000 of CD interest myself over 10 years, yet substituted the lost CD fixed income with saving $600,000 more income instead. I always wonder if the fed plan backfired on savers like me, as I spent much less towards GDP having no ability for a safe in fixed return, versus higher rates of the past. Multiply the $200,000 more I saved due to the uncertainty and fears caused by emergency policies by only 500,000 savers (0.16% of adults), and you are talking $100 billion. I have seen the analysis of over a trillion transferred from savers to debters over the last 10 years. I just happened to save my way out of that fate, and can only assume others did too. But I’m sure it all looked great on paper to the PhDs at the feds.

  11. bungee says:


    you said:

    The people cannot earn a return on their savings.

    We’re not supposed to. Get used to it. Your solution to riot in the streets is typically ineffective. It leaves a lot of folks bitter, fanatical, injured and a lot of “evil bankster” types laughing. A real solution, that anyone can do, is to save in physical gold instead of investing in volatile markets.

    Earning a return is associated with investing, not saving. Investing implies two things: work and risk. “The people” are so hopelessly confused on this topic that they believe they have the right to a yield. They have nothing of the sort.

    The correct way to look at this is “the people” are unwitting investors masquerading as savers. Teach people this and they will do far better then some lousy protest.

    Tom Jones (comment above) states what is becoming increasingly obvious: that no one is going to fail on paper, but paper will fail. But I don’t know why he puts “solution” in quotes and uses (sic). It IS the solution. Currency devaluation is the right thing to do.

    • andy says:

      And if they make gold illegal to own?

      • bungee says:

        First off it’s poor policy. Gold will flee from “their” currency zone to one where it is freely traded. “They” will have to reopen the markets in order to have a stable reserve because debt will no longer serve as such.

        But the real reason is this isn’t the 1930’s and we aren’t on a gold standard. There is no reason for a government to confiscate gold like there was back then. We can print all we want and there is no peg that we need to maintain. Let gold go to the moon. Who cares?

        • If you are a central bank and you can print money and use it to buy gold why wouldn’t you?

        • bungee says:

          Ambrose Bierce,
          Well, central banks DO buy gold. Where do they get their money from?
          But more to your point, the CBS are trying to keep the game going, not blow it up.
          Of intrest might be some of their past “agreements” concerning gold selling and leasing.

    • JZ says:

      The people have NO right for yield on their savings. Fine. But the people have the burden of inflation? And they promise they won’t stop until inflation is 2%?
      I am with you. I don’t think savers have any right for yield. But I think they have to get some yield to hide their inflation target, right? Other wise, this NO RIGHT ONLY BURDEN deal is hard to swallow. I don’t think they want to educate then mass that way because there are 300 million guns.

      • Brant Lee says:

        It just shows how worthless our ‘Money’ is when people are saying savers have no right for yield. It wasn’t always that way before the dollar printing presses geared up, all ties to gold were dropped and banks competed for our savings (Yes, there was a time when banks actually did).

        • Unamused says:

          It just shows how worthless our ‘Money’ is when people are saying savers have no right for yield.

          Present value is still positive. Future value, not so much.

          The trick is to exchange it now for something that will have value in the future. That at least hasn’t changed.

    • Memento mori says:

      Currency devaluation is not the right thing to do, its the immoral thing to do.
      You are right that that earning a return is associated with investing, not saving, but that is the case when inflation rate is zero. Any inflation above zero is stealing from savers and in a honest world need to be compensated by a real return.

      • Dietmar says:

        I would say, the main point is that these gangsters steal our purchasing power, in other words our time is worth less and less. Even if you put more work and effort into something you end up with less, as long as we are forced to deal with FIAT currencies. With each €, $, £, ¥ we accept or pay with we reinforce the chains.
        I hope to see the day we are free.

        • Tyson Bryan says:

          Switch to the “oz” (as in wizard) as your unit of reference. 1 oz = 1 once of silver. The $ denominated brain is a dead brain.

    • NG says:

      Once upon time, long ago, the deal was that people put their money in banks, the banks invested the money in productive assets and the savers got a modest return for putting their trust in the bankers’ smarts. Of course this was a scheme not scrupulously followed, but it was reasonable for most people to believe that since real growth and real productivity were being realized, there was some basis in the proposition.

      • sierra7 says:

        You are correct!
        One of the key words in your post, “trust” has been discarded as “old school”!
        So much changed in the 1970’s and ’80’s when corporations discovered they didn’t really “need” banks anymore…..they developed their own “investment” departments. Banks had to come up with another way to survive.
        That’s when so much more risky chances were taken by those banks and other financial entities who depended on that business.
        Then everyone accelerated the chase for “yield”.
        The “credit card” business was born; fleece the ordinary with extra-ordinary interest rates….give cards even to the brain dead.
        The Savings and Loan fiasco; junk bonds, de-regulation and “derivatives” (thinner and thinner slices of the economic salami until, “poof”… disappears!); political collusion……..”….get ’em all in debt and let the FED sort it out!”.
        Today in many ways the “markets” are just a “free for all”. The ordinary saver still goes to the cookie jar and hopes to find some scraps to buy “bread”.
        This is a game played by the owners of the “thrones” until the game is over……but not until then.
        When that ceases and the “commons” realize they have been grossly betrayed by outright greed then you will have REAL chaos.
        Welcome to the free markets!

    • Unamused says:

      Currency devaluation is the right thing to do.

      Since the value of currency is determined by the quality of the underlying economy, devaluation is the inevitable outcome when the economy is impaired. You don’t actually need to do anything.

      The economy is impaired because it is bled to support financial bubbles, but that will end because it is bled so much it cannot recover.

      Gold is a commodity, not a productive asset. It is useless as food, fuel, shelter, or transportation. Like anything, its price is only what other people are willing to pay for it, but that is largely determined by a kind of religious faith, not because you can actually do much that is constructive with it.

      • bungee says:

        Hi Unamused,

        …devaluation is the inevitable outcome when the economy is impaired. You don’t actually need to do anything.

        I agree. Devaluation is inevitable and fighting it on moral grounds is quixotic. Some politician or banker will technically have to make the decision to print, but essentially they have no choice. Regardless of party affiliation. My point is to not be upset with some politician that prints one’s ‘savings’ out of existence.

        Gold is a commodity, not a productive asset. It is useless as food, fuel, shelter, or transportation.

        Gold is NOT a commodity. Commodities are the very things we use for food, fuel, shelter &c…
        What would happen if people saved in corn? Hoarding corn for the apocalypse? Besides the obvious storage issues, it would create a spike in foodstuffs and there ultimately would be social unbalance. The same holds true for any commodity where a short squeeze would bring out the goods if a revolution didn’t hit first.
        But what if gold were to skyrocket in price? It wouldn’t matter because we don’t use gold for anything EXCEPT savings. It can be a million dollars an ounce and my sandwich can still be 10 bucks. Because no gold was needed to transport the ingredients, pay the worker, build the cutting boards or the knives needed to prepare the food or the table where I eat it. See? Gold’s uselessness contributes to it’s value.
        p.s. jewelry doesn’t count but that’s another story

        p.p.s. as for the religious faith bit… I haven’t the space to refute properly. But my argument would be that you are ignoring many time-tested, valuable properties of gold that separate it from every single asset class on Earth.

        • Unamused says:

          And still, gold is not a productive asset. All you can really do with it is hoard it and hope a Greater Fool comes along to take it off your hands.

          It’s obsolete as money. You can’t do stock or bond trades with it because it can’t compete with ones and naughts. It can’t even compete with paper currency. Functionally bullion is just unprocessed jewelry.

          It may be helpful to acquaint yourself with the colloquial definition of ‘gold brick’, which is an unproductive employee.

        • bungee says:

          I know gold is obsolete as money. That doesn’t mean it will fetch a low bid. The classic cars Wolf writes about are obsolete as road vehicles, but still people will and do pay a premium.
          ‘Unproductive’ means ‘no yield’ which, in this case, means no risk which is what you’re looking for in a store of value.
          It is not in competition with money. It is something valuable today that will be very valuable tomorrow. During large shifts in the world of money, currency is repriced downwards by gold. It does not go back.
          If only unproductive employees really WERE gold bricks! But no, they are expensive, but worthless. Gold however is priceless.

  12. gorbachev says:

    When the Gov’t decides that it needs a strong

    currency they will make it happen probably through

    high interest rates.But while they have control of

    the most in demand currency why would they.

    • Old-school says:

      Warren Buffet isn’t always right but I heard him say about a year ago his BRK doesn’t hold a single long term government bond. The reason is you are going to get paid back in devalued dollars.

    • JZ says:

      Why? By the people, for the people.
      Right. Off the people, Buy the people, F*** the people. Why don’t they?

  13. Cyclops says:

    Our US government is supposed to protect the people and not Central banks!

    But over the decades our politicians got corrupted by changing the laws to more favorite terms with corporate capitalism which controlled by the one percent!

    Central banks cut debt rates to extreme low to bail out the big banks and mortgage crisis during 2008 R.E bubble. Now those same big banks getting squeezed by ultra low rates! Easy money greatly inflated housing prices all over the country and literally exploded on the coasts.

    Millennium getting crushed and many work several part time jobs to make ends meet.

    Top 40% hired at the Federal Reserve bank are from Goldman Sachs!

    Oops! We the people are screwed!

    • Unamused says:

      Our US government is supposed to protect the people and not Central banks!

      You’re assuming the US government runs the country and isn’t just a proxy for the real rulers.

  14. Old-school says:

    Governments use zirp and nirp to make holding savings hurt so you will jump start the economy. Best thing to try to do is to try to let some other fool spend if you don’t need it.

    Have your plan. You need investments to match your time horizon. Duration matching is one way. If the Fed looses control it’s a long way down for stock market. Only 12 years ago we were at 666. It’s not impossible to go back there. Dividends on SP500 are only $57. I am not going to pay $3100 for $57 of dividends. The math doesn’t work.

    • morticia says:

      1-They did low rates, but you can only go to zero ( negative rates is a completely different tool )

      2-they did QE, you do that after you can’t drop rates any lower

      3-Next bag of tricks is helicopter money, and dump on right ppl they will spend

      4th and last is to tax the rich, and make them poor, they always save that one for last

      For all human history that’s the tool bag for Mercantile fiat economy’s, stage-4 is called ‘populism’ it happened in 1930’s with election of FDR

      Right now we’re between 2->3, rates are low, QE has been tried, and now its time for helicopter money if that doesn’t satisfy the Minions, then they will go full POPULIST and elect a WARREN and scalp the rich.

      You can fool some of the monkeys some of the time, but you can’t fool all the monkeys all of the time.

      Today is quite similar to Great-Depression, then baby’s were dying for lack of food, now people just die from fenytal OD’s or on the street covered in feces; At some point the little people realize that its time to RESET the government

      This is why Dalio, Buffet, and Gates are terrified. They know FDR is returning.

  15. morticia says:

    1-They did low rates, but you can only go to zero ( negative rates is a completely different tool )

    2-they did QE, you do that after you can’t drop rates any lower

    3-Next bag of tricks is helicopter money, and dump on right ppl they will spend

    4th and last is to tax the rich, and make them poor, they always save that one for last

    For all human history that’s the tool bag for Mercantile fiat economy’s, stage-4 is called ‘populism’ it happened in 1930’s with election of FDR

    Right now we’re between 2->3, rates are low, QE has been tried, and now its time for helicopter money if that doesn’t satisfy the Minions, then they will go full POPULIST and elect a WARREN and scalp the rich.

    You can fool some of the monkeys some of the time, but you can’t fool all the monkeys all of the time.

    Today is quite similar to Great-Depression, then baby’s were dying for lack of food, now people just die from fenytal OD’s or on the street covered in feces; At some point the little people realize that its time to RESET the government

    This is why Dalio, Buffet, and Gates are terrified. They know FDR is returning.

    • TaxMeIfYouCan says:

      Morticia – I agree with your points on the multi-stages, and the ghosts of FDR. I just wish I had any idea on when the next stage is going to happen. Warren 2020 vs Warren 2024 or Warren by 2028 completely changes the equations of SP500 at 4,000 or 1,500. It is not too complex of an equation, just too many unknown variables at this point in time.

      And as far as Gates running scared, he had his chance to drop a billion or two into the political lobby system to get the top tax rate changed back to a higher rate, along with a higher capital gains rate. Buffet too, and all they did was talk, talk, talk as talk is cheap, until is isn’t, like right now. He blew it, actually all the billionaires, including Cuban and Musk as it would have been in all their best interests, and the interests of America as a whole, if they had spent billions lobbying to change the top tax rate back to 70%, the same exact top fed income tax rate when Gates started Microsoft. Gates proved that the richest person on earth (until Bezos) could start a company with 70% top tax rates and STILL own more wealth than any human could possibly spend on their own. Unfortunately greed is a human disease, and it made them all ignorant of future consequences. I expect more billionaire tears on CNBC, yet they are crocodile tears at best…so good luck with that…

      Now instead of having a 70%, or even just a 50% top income tax rate, Gates is going to have to spend the rest of his life hidding his assets against a “wealth tax”, and business owners like me and others will spend thousands via CPA and tax experts to prove on an annual basis that we are not worth $50 million. Thanks Gates, much appreciated! My plan is to sell out and invest it all into the ponzi scheme stock market, post 30% to 60% market crash of course!

      • Yerfej says:

        The country doesn’t need a 70% tax rate or anything near that level. The issue is SPENDING not tax collection. Wander around any Walmart or Naples beach and you will see that poor and rich are huge fat whales feeding on the excess in the vote buying scam.

      • Setarcos says:

        1.Spend money lobbying pols to tax at 70% rates? 2.And not doing this indicates greed? 3.And that would satiate lizzie and her axe for how long?

        1&2 okay, it took a moment but I get it. But the strategy doesn’t remedy 3. A core principle of totalitarians is they decide when they are satiated, not us. And they can never be satiated. The source of their deficiency is always the last place they look (in the mirror).

  16. bungee says:


    you are talking out of both sides of your mouth, my friend.

    I don’t think savers have any right for yield. But I think they have to get some yield to hide their inflation target…

    Basically, you are saying that savers should become investors in order to not lose purchasing power. And that’s the status quo. People believe that it’s smart and responsible. But remember, investing is risky….so….they might LOSE! But that was their savings! They didn’t want risk. They wanted safety. And this is my point. And this is what gold resolves.

    Memento mori,

    you wrote:

    Currency devaluation is not the right thing to do, its the immoral thing to do.

    Passing a totally unproductive 23 trillion dollar and counting debt onto the next generation is immoral. Expecting them to service it, let alone pay it off in real terms would be a human-rights disaster.
    In such circumstances as we find ourselves in, neither real payment nor default are realistic options. Think about it this way: if we inflate it away, everyone is affected, not just a few. The debts are cleared and at least everything squares on paper.
    Beware if your savings are flammable.

    • Kerry says:

      People will not get it until it is too late. Damn History…

    • JZ says:

      When I say “They”, I mean the bankers, the “ruling class” who, per your advice, should tell the people that they have no right of yield, but at the same time, the inflation would be 2%.
      I am NOT saying savers should invest.
      I am NOT saying savers should do nothing and let their savings decay at inflation rate.
      Each saver can do what ever they want given the situation, and individual circumstances.

      What I am saying is that if “THEY” educate the people in your way, and clearly tell savers that they have NO right to “yield”, but the burden of inflation is FOR SURE, it is a bad way of ruling since savers may bring out 300 million guns.

      What I am saying is that “they” better let/educate savers believe or false-believe savers are “entitled” to some yield to make the inflation more acceptable and the mass is in tame.

      • bungee says:

        Im talking about we the people teaching one another. I have no expectation of central banks educating us. We need blogs like this just to decode what they’re saying.
        Everyone has the right to TRY and attain a yield. But a guaranteed yield is an oxymoron. People who need yield on savings had better hedge, because there is inherent danger in their position; as you say, the burden of inflation is FOR SURE.
        I’m talking about something people can actually do. There is a lot of confusion on what is to be expected from a market. I dont believe we will legislate our way out of this. I’m not a fanatical gold bug. I really see it as a solution for common people and want others to know its not dumb or crazy to think that way. When they complain about yield on their savings I make these points to light a better path. Im hoping we can make this transition with minimum use of our 300 million guns. Gold in the hands of common citizens is the best way forward.

        • JZ says:

          I also prefer to use gold to solve this as opposed to guns. My suspicion is that “they” the ruling, will keep going until the guns are out. Gold is a faith of persuasion and trust. The ruling class use laws enforced by guns. Just see what happens when gold is banned/confiscated.

    • JZ says:

      Savers have NO right to yield. I have heard another version of this nonsense saying the QE has benefited all the “SAVER”s because all bond prices go up.
      This is deliberately confusing SAVERS with BOND INVESTORs.
      Just one thought experiment. Imagine the FED does NOT control the FED funds market and FED does NOT force the rate on short term lending/borrowing.
      I am saber and JPM and BOA better beg me for my deposit. I am NOT entitled to any yield and the bankers are NOT entitled to my deposit.
      Bond investors deal with interest rate risk, default risk, they hedge, they match durations. Savers are simple, where do I put my deposit that I might use within 3 month or a year or next day. The banks better let the savers entitle to something, otherwise they will NOT have deposit. Yet the entire thing is flipped up side down because banks can source funds from the FED printer, together with inflation, this forces savers out of the risk curve to be bond investors. Of course bond investors are NOT entitled to yield or guarantee of principle. If you truly think about what the FED has done, they basically smoked savers in favor of bond investors.

  17. paul easton says:

    I know nothing about economics but I do know a little about logic. The central bankers aren’t stupid. Their policies are designed to benefit the ruling class. By now austerity has impoverished the 99.9 %, so the multi-billionaires need to fleece the multi-millionaires. If most of the banks go down the few remaining banks will be sitting pretty. The only solution is to nationalize banking.

    • Unamused says:

      The only solution is to nationalize banking.

      “The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks.”

      – John Emerich Edward Dalberg-Acton, 1st Baron Acton

      Guess what? The banks won. The cartels are untouchable.

      “… the powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences. The apex of the system was to be the Bank for International Settlements in Basle, Switzerland, a private bank owned and controlled by the world’s central banks which were themselves private corporations.”

      Quigley, Carroll. Tragedy and Hope: A History of the World in Our Time. New York: Macmillan, 1966. Print.

  18. Wisdom Seeker says:

    Wolf, you’re describing the return of “Certificates of Confiscation”.

    That’s what government bonds were called during the last bout of financial repression, when interest rates were below inflation rates back in the late 1960s and into the ’70s.

  19. ItsCollateralBaby says:

    +80 bps more on UST 10y and 10.6% of the 1981 “IG” trash trading above par underlying LQD will offer no yield premium.

    JPM doesn’t want you to worry until +160bps

    Setting aside ignore all the derivatives on such…
    Setting aside ~47% currently rated 3 notches or less above junk…


  20. MC01 says:

    To meet TLCA and MREL requirements, Euro-area banks will have to issue about €200 billion in bonds from here to 2022. And that’s on top of bonds they’ll have to issue to meet the rest of their capital needs.
    As big as euro bond markets are (and they are), these banks cannot issue so much paper in such a short time without consequences, at least not without the ECB buying at very least 30% of these new issues. But the corporate asset purchase program doesn’t allow it and Mr Draghi was unwilling (or more likely unable) to force the issue through.

    European banks were betting on the continuation of bond market insanity to push these issues through: we are talking junk with coupons under or even well under 1.5% and maturities ten years or longer… the only reason to buy this stuff is to sell it to somebody else down the road at a profit. Would you lend money to Deutsche Bank, Banco Sabadell or Unicredit at these conditions?
    Unless the ECB changes rules and expands the corporate asset purchase program (again) those €200 billion will cause a spike in yields, not so much because people are discovering that risk never went away, but because bond markets will become oversupplied, especially at the zero coupon or very nearly so end of the spectrum.

    Of course there’s a another solution: do away with MREL, TLCA and similar programs, but also remove any implicit and explicit bailout guarantee for banks and their bondholders. Depositors have been guaranteed since the 70’s and present bankruptcy laws are nowhere near as punitive as they were in the 80’s. ;-)

    But as Groucho Marx so wisely said “Politics is the art of looking for troubles, whether they exist or not, diagnosing them incorrectly and applying the wrong remedies”. With a failed politician at the helm of the ECB and the “new” EU crammed full of people escaping the humiliation of being sent packing by voters (just look what happened to M5S in Italy… from hero to zero in little more than a year) I expect the idiocy to reach fever pitch.

  21. Old-school says:

    It’s scary that people like Bernie and Warren who probably know less about economics than me want the power to spend 10 – 30 trillion$ of societies wealth. It’s a good thing that at least they have to get it through the house and Senate before it becomes law.

    • Unamused says:

      It’s scary that people like Bernie and Warren who probably know less about economics than me want the power to spend 10 – 30 trillion$ of societies wealth.

      Except that they don’t. But don’t let facts get in your way.

  22. Old-school says:

    I think maybe there is some merit to the US fiscal and monetary policy although it is an experiment. By running maxed out Fed and fiscal policy you extend the economic cycle. Having max number of people employeed, paying taxes and off the government dole has some merits. What is going to happen during next recession may be worse, but central bankers seem to like to let things run until something blows up and then figure out a way to deal with it.

    • Setarcos says:

      The next iteration of rube goldberg machinations might not be effective (without totalitarianism). When the Fed speaks everyone stops what they are doing to listen …their power has reached it’s apex, having taken the slow winding stairs. But theirs is a price fixing scheme and the only way down is a window. Ironically we are convinced they are trying to help, despite the ever worsening situation as evidence to the contrary.

  23. Taps Coogan says:

    I like to think of negative rates as a giant negative carry short trade on the global economy held by the most conservative institutions in the economy. Horrible idea in so many different ways…

  24. Iamafan says:

    How exactly does negative yielding debt SHRINK?

    • MC01 says:

      I’ll try to explain, but I am not Wolf.
      The yield on a bond, or any other asset, is given by three components: the price I paid for it, the coupon it gives to me and duration to maturity.
      When you hear of “negative yielding assets” it doesn’t mean you have to give cash to the company that issued the bond because bonds cannot pay less than 0% coupon: it means the price I paid for my bond was so high that at the present duration to maturity I will lose money if I hold to maturity.

      Example. A bond with a face value of $100, a maturity of 10 years and yearly 4% coupon has a yield of 4%.
      But if I pay exactly the same bond (same face value, same coupon, same maturity) $150, I get a nice negative yearly yield of -1%. At maturity I will be given $100 back, and I will collect $4 every year (let’s leave taxes and fees out, shall we?), meaning the yield on my initial $150 investment is a whooping -$10 or -$1 per year.

      The amount of negative yielding debt shrinks for one reason and one reason along: prices are going down, so yields are going up.
      But as much as they have been going down, they still have a very long way to go: exactly one year the yield on Italian 5-years bonds was 2.24%. Right now it’s a whooping 0.54%, or about twice the yield they had back in August. Expect Christine Lagarde to jawbone bond markets incessantly until she can convince the opposition at the ECB to start buying those rusty old bicycles.

    • Wolf Richter says:


      The pile of negative yielding debt shrinks when the price of some securities falls enough and their yield turns positive. Once the yield is positive on these securities, the value of these securities is no longer part of the negative yielding pile, and so the pile shrinks.

      For example:

      A government bond that is sold by the government with a zero coupon but at a premium to face value has a negative yield because at the end when the bond matures all you get is face value; you lost the premium, and you never got any interest payments. So for you, the yield is negative at the time you buy it, and this bond is in the pile of negative yielding debt.

      But when the price of the bond falls in the secondary market, as yields rise, and you buy this bond at a discount in the secondary market and hold it to maturity (when you get paid face value), you earn the premium, which is part of the yield, and therefore for you the bond has a positive yield when you buy it. So when this bond sells at a discount that is big enough to give it a positive yield to maturity, it is no longer part of the negative yielding pile of bonds, and that pile shrinks.

      • Iamafan says:

        Great. Thanks.
        Now Ms. Lagarde has sprayed French Perfume on Negative Yields eradicating their stench (maybe), and making them magically disappear from her trash bin. They are still stinking trash inside.

        What will they think of next?

      • Zero yielding bonds will always yield zero and may gain par value relative to dislocations in the market, they represent a claim on the value of the currency, and the amount of dollars you can redeem for a zero yield bond and 5% bond is exactly the same, the only difference is that government will subsidize your initial purchase in the first instance, if price discovery is allowed to function and the market prices their product according to supply and demand. Government could cap auctions at par, to avoid this problem. Or they could buy their own product surreptitiously. The point of paying more than 100 points for a zero yield UST bond is that your expect the purchasing power the dollar to increase, and markets, therefore, must fall. There are other reasons for owning bonds, If a ten year bond has the cash equivalency of a 30 day note that collateral functions just as well, when it doesn’t the Fed pulls them out of their balance sheet and replaces them with T bills. And sure enough rates at the long end are rising, BUT correlation is not causation. Fed has this thing by the tail and it will get worse, or better depending on your view.

  25. doug says:

    Do you love the F35? and what it costs? w/o any public debate????

    Most studies show we pay more now (for worse outcomes) than we would with medicare for all. The total area under the cost curve is less with medicare for all. Please try to understand that.

    Apologizing in advance. This is not a political discussion site and I see it creeping in. Feel free to delete this and other political comments.

    • Endeavor says:

      They would adjust Medicare for all costs to providers to keep them in the fat. We would be stuck with the lousy deductables Medicare has and the have to spend even more on supplements.

  26. Wes says:

    Mr, Richter:
    price discovery = actual risk?
    However, no price discovery does not equal no risk.

  27. Bam_Man says:

    Negative-yielding government bonds are nothing more than a “deflation-proof” hiding place for those managing large “investment” portfolios.

    Abject fear of deflation in such this hyper-leveraged “investment” environment is actually quite rational. With corporate debt-to-equity ratios now at nosebleed levels (in good part thanks to ridiculous share buybacks), the next global downturn – if long and deep enough – will absolutely devastate equity markets. European bank “depositor bail-in” policies also contribute to willingness to accept negative yields-to-maturity on government bonds.

  28. Old-school says:

    It’s so easy for politicians to make a promise not understanding what they are doing. I have talked to 3 retired non officer veterans each drawing over $5000 a month. I am sure each has his own story. My uncle who is 95 retired at 40 and is one of the three. He is in good health and could make it another 10 years. That’s a long tail to ww2 and Korean wars. We are going to have massive obligations to pay from Vietnam, Iraq and afghanistan. It seems like we are determined to bankrupt ourselves.

  29. Iamafan says:

    Can someone please explain to me why the 10Y yield went up a lot (or exploded high) when we just had the largest 10Y auction ever?
    $39,784,731,300 accepted is almost twice what the 10Y Treasury average auction for 2009 was ($21,365,604,125).

    Shouldn’t a high demand depress yields?
    Usually yields go up to “entice” buyers because there are fewer than expected. Are investors realizing an inflation surge?

    • unit472 says:

      Damn good question. Maybe its like car sales. When you have a glut of new cars you have to offer discounts to move inventory. Since governments are unable to reduce spending their ‘production’ of bonds cannot be reduced but, unless their Central Banks use QE to buy them, there is no ‘demand’ for them unless the yield goes up.

      The dilemma becomes when governments need to ‘roll over’ their debt they get stuck with the new higher yield. This can be fiscally crippling to heavily indebted nations as they must service their existing debt and to do that they need to issue new debt bearing the higher yield.

      Expect this to end badly in the next recession as government revenues collapse at the same time as entitlement spending soars.

    • Maybe they needed to sell a lot of product to fund spending. The recession gets closer, the entitlement requirements rise, the economy is not creating growth for middle class taxpayers. They have a funding crisis, result of tax cuts for multinationals and no jobs coming home. A great time to be Liz Warren.

    • Wes says:

      “Shouldn’t a high demand depress yields?”

      Not necessarily…

      • Iamafan says:

        5% (about $2 bil) of the total accepted bids had yield of 0.880% or less. How excited could these people be? Those less excited got a yield of 1.809%

        Even on a bid-to-cover ratio of 2.49, it was higher than 2018 and going rate 2019 average of 2.40 and 2.42, respectively.

        So what do you think the other measure of demand should be other than comparing historical auction size or bid-to-cover?

        • Wes says:

          If I had to venture a guess one would need to look at each individual/entity with respect to “competitive” bidding.

          One other note, I recently listened to a presentation by Jeff Gundlach and he cautioned about long rates going higher due to the amount of treasury debt being issued. The US treasury is/will need to raise long term rates to attract capital and compensate for the risk exposure, and if this is not sufficient, the Fed will have to absorb the excessive issuance. A combination of both most likely. Jeff also didn’t hesitate to mention currency devaluation as an option. Jeff stated that he was not long the bond market i.e. long maturities. I do have a pdf of Jeff Gundlach’s presentation but I’m not sure whether to post it. He also discusses an equity top and uses historical data/charts to support his reasoning. One thing about Jeff is that he doesn’t talk in circles or intentionally omit proprietary information as “others” do for their own gain/benefit. When J. Powell and the FOMC reversed course Jeff was, to say the least, disappointed.

          To those who are worried about holding “cash or equivalents”. I would mention Buffett, who’s setting on a ton of cash i.e $128 billion and I can guarantee you that it’s not physical cash setting in a Federal Reserve bank vault. I can guarantee that it’s liquid and can be converted to “cash” very easily.

  30. JZ says:

    I am a believer of if the human race collectively run under sound principles, human can solve a lot of problems productively.
    Health care, education, housing are still at business level, they are the symptoms of unsound principle at lower foundation levels of money.
    I “think”sound money principle will automatically fix out-of-control issues at business level.
    Politicians who promise to fix business issues without restoring sound principle at money level are vote/money/power grabbers. All they will do is to use the power to blackmail the business and extort compensations.

  31. Ole C G Olesen says:

    Please illustrate with a 1 million USD example HOW MUCH an INVESTOR would have LOST of his Capital with the price move from
    1. France 10 Year: – 0.45% to +0.023%
    2. Spain 10 Year : 0 to 0.39%
    3. Belgium 10-year: – 0.38% to 0.02%,
    4. Switzerland 10-year : -1.10% to -0.40%.
    5. Japan 10-year: -0.29% to -0.06%
    6. US Treasury 10-year : from end of August to 1.94%.

    • Wolf Richter says:


      I looked up the quotes on one of them but don’t have the time to do it for all of them. But you can do it if you wish. The data is out there.

      So here is a 10-year US Treasury note, CUSIP 912828YB0, sold at auction by the government on Aug 7, 2019, at a price of 99.81 cents on the dollar and a coupon of 1.65%.

      On Friday, the same note (same CUSIP) traded at 97.5 cents on the dollar, down 2.31 cents on the dollar from the auction price in August. If you sold on Friday, your $1,000,000 investment in these notes would have generated a capital loss, not including commissions and fees, of $23,000.

      To answer your question with your specific timing:

      If you bought the same notes with the same CUSIP in the secondary market on September 3, near the peak of the market, you would have paid 101.6875 cents on the dollar. If you sold on Friday, you would have gotten 97.5 cents on the dollar, down 4.1875 cents from your purchase price. Your $1,000,000 investment would have generated a capital loss, not including commissions and fees, of $41,875.

      • Iamafan says:

        Wow, what a fantastic real world example. Great clarity.

        Now if you use that same bond for REPO COLLATERAL, wouldn’t it also be worth LESS?

        • Iamafan says:

          Hey Wolf,

          If Treasuries can be this volatile, wouldn’t lenders demand more protection from price change risks if they get stuck with the collateral.

        • Throwing money at Repo drives rates lower. Check out SOFR if you think this is somehow an honest measure of interest rates. It’s not QE but the banks can borrow at mark to myth collateral values. That’s the point.

  32. Unamused says:

    Bernie and Lizzie keep telling me how wonderful “free” health care is

    Except that they’ve told you no such thing. But don’t let facts get in your way.

  33. Bobber says:

    Before the central banks start doing something really stupid (negative rates), maybe they should ask why most financial advisors have a 8% return assumption in their retirement models, and why pension funds have a 7% return assumption. There seems to be a disconnect there.

    Maybe financial advisors are still under the impression that we have a market-based economy, rather than a wealth distribution system that favors speculators and debtors.

    • sunny129 says:

      ‘maybe they should ask why most financial advisors have a 8% return assumption in their retirement models, and why pension funds have a 7% return assumption. There seems to be a disconnect there.’

      Dreams cannot be sold based on reality but ‘sweet’ unrealistic assumptions, as long as the clients don’t use their brain! If the actuaries really did their job, the kool-aid they are selling, will become hard! Now who wants that?

      • Frank Sanchez says:

        I was always taught in life you never assume which is just like wishing. I agree with you sunny129, people are too believing and trusting of anyone with handling or dealing with money, finances.

        It is not entirely their vault because fix and rig masters, central banks, governments and other financial industry players like real estate, mortgage, line of credit, credit card financing is literally making the whole personal, corporate, business and government finances it all a real terrible mess with all manipulated stock buy backs, low to negative interest rates, U.S. Fed and others pumping in money and out like it is a water hose under their primary control etc.

        I don’t trust anyone or anything that tells me 7%, 8%+ are long term returns for me and my family’s money. I have since 2000 when we really had money to invest in larger amounts always depended on 3.5% to 4.5% on average with of savings rate now 50% of net income versus 35% when we first started. We are glad we planned much ahead because we saw the trend of lower stock market, equity type investments mutual funds, ETF’s, income trusts, real estate, mortgage, CD rates and more.

  34. Tommy G. says:

    Bond yields are dropping again from their recent highs, 10 year 1.93 now 1.83% for example. I noticed they always try to push down rates for Christmas season just like with gas prices to help the indebted losers.

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