Making the Mattress Look Good
“Investors are willing to lose a little to make sure they don’t lose a lot.”
–“Accentuate the Negative”; The Economist (1/24/2015)
Could today’s already infinitesimal interest rates ever actually fall below zero, to the point where mortgages sport negative interest rates?
My knee jerk reaction is, “Of course not! That would be absurd. Why would anyone lend money to someone else and agree to get back less in the future? (never mind interest).”
But, that’s what I would have said, less than 18 months ago, about the prospect of various government bonds (10 so far) paying negative interest.
$1.5 Trillion in Negative Yielding Global Bonds
In case you didn’t know, there are apparently something like $1.5 trillion in global bonds now yielding literally less than zero.
While most of that money is short-term debt, not all of it is: investors have purchased a 10-year Swiss bond that pays negative interest.
Back in the ’70’s, when bonds actually paid interest — but not enough to keep up with roaring inflation — they came to be known as “certificates of confiscation.”
Today, the term applies not just in a real, economic sense but in an absolute one.
Attractive Alternative: The Mattress
Why would investors accept such a guaranteed loss?
Or, as The Economist puts it: “Why on earth would bond investors, the ‘masters of the universe’ once famed for intimidating governments, be willing to accept such a lousy deal?”
It cites three possible reasons: 1) institutional investors need a parking place for short-term money (mattresses aren’t an option); 2) investors are betting they’ll make money from currency gains; 3) there is a guaranteed Buyer of such bonds (the European Central Bank) if/when it launches its own version of The Fed’s quantitative easing.
Call strategy #3, “Buy High, Sell . . . Even Higher.”
(Note to those not savvy about bonds: prices and interest rates are inversely related).
Alice Janet Yellen in Wonderland; “Quadrupling Down”
At least to me, all of this has a surreal, “Alice in Wonderland” quality.
Having embarked on a path of quantitative easing more than six years ago, central monetary authorities have had to “double-down” and now “triple” and “quadruple-down” on their medicine of choice, given the continued weak global economy (outside of financial markets, at least) and ongoing fiscal deadlocks.
Which prompts this observation (and question):
It’s one thing to go through The Looking Glass.
But, having done that . . . exactly how does one get back out??
