Negative Interest Government Debt

Discussion in 'Financial Futures' started by bone, Jun 21, 2019.

  1. bone

    bone

    $13 Trillion in Government Sovereign Debt is trading at negative interest rates according to Bloomberg. As a side note, no central bank will sell you a negative interest bearing instrument - they are purchased on the secondary dealer market.
     
  2. H2O

    H2O

  3. Not an expert, but why would anyone buy a negative yield instrument?
     
  4. H2O

    H2O

    Fundamentally: Banks are charging negative interest on deposits (EUR / CHF come to mind). With expectations that ECB deposit rates may be cut further, and these cuts being passed on to depositors, negative yielding instruments may be an interesting alternative. Also take into consderation the difference between return on capital vs return of capital (the latter being 'guaranteed' by investing in German Bunds for example, similar to investing in US Treasuries for US investors)

    From a trading perspective, traders who bought Schatz when it was yielding around -0.50% say 3 months ago have made a decent return with yields currently closer to -0.75%
     
    nooby_mcnoob likes this.
  5. bone

    bone

    Yeah, I mean Japan had negative interest rates for a very long period of time - over a decade as I recall. And the ECB and the BOJ are openly signaling upcoming rate cuts. It's weird to me (negative rates) and counter-intuitive - but there are commercial investors (insurance companies and many pension funds come to mind) that are required either by law or by charter to invest a percentage of their portfolio or cash on hand in sovereign debt.

    If you are a short term large speculator trading the basis - negative yields are just fine because you are spread against the futures and the overnight repo rate.
     
  6. piezoe

    piezoe

    I guess this solves the problem of servicing the debt; it will be serviced by the bond holders. ;)
     
  7. bone

    bone

    Well, those coupon payments are going to the secondary market counter party not the Fed.