“Take my money. Please—I’ll pay you!”

Here’s just about the craziest financial chart I’ve seen in some time.

Total negative debt in the world: Deutsche Bank

Courtesy of Deutsche Bank, via CNBC, this is a plot of the total face value of government bonds (not, as the chart is mis-labeled, all debt) which now trade at negative yields.  In other words, if you buy the bond today at its market price, hold it to maturity, and add all of the interest it will pay from now until it matures, you’ll end up with less than the price you paid for the bond.  And this is in “nominal currency”, not accounting for any depreciation in the purchasing power of the money you get back (due to inflation) compared to what you paid for the bond.

Fixed-income investing (bonds, time deposits, etc.) used to be easy to understand and, let’s face it, boring.  It’s supposed to be boring: “gentlemen prefer bonds” because assuming the issuer doesn’t go bust and default on the debt (which can’t happen with bonds issued by a government that can print its own money—the money you get back may be worth less or worthless, but you’ll get it back for sure), you’ll earn the steady rate of income quoted for the bond when you bought it all the way until maturity, when you get your money back.  As interest rates go up and down, the market value of the bond will fluctuate, but that doesn’t matter if you hold it until maturity, when it pays off at face value.

Usually, the longer the term of the bond, the higher rate of interest you’ll earn, since investors demand a greater yield in return for tying up their money for a longer period of time.  This isn’t always the case: in fact, we’re presently in a period of an inverted yield curve, which I discussed here in an earlier gnome-o-gram.

But what could possess investors to bet on a sure loser: an investment which is guaranteed to pay back less money than was paid for it?  And this isn’t just some rubes who fell for a fast-talking salesman: there are fifteen trillion US dollars worth of these bonds in the portfolios of institutions (banks, pension funds, insurance companies, corporate treasuries, government agencies) worldwide.

The reason is basically fear (and, in the case of some institutions, mandates that they hold some fraction of their assets in government securities).  With yields on even substantially risky bonds in the cellar, at least you don’t run any risk with the government bond and you only lose a little money.  (For some reason, the alternative of simply ordering up a pallet of high-denomination bills from the central bank and putting them in the vault doesn’t seem to occur to these people, or is considered beneath their dignity.)  And with equity markets looking over-extended and volatile, that option is increasingly unattractive.

It isn’t just government bonds, either.  Here’s a chart by Bianco Research, published by Market Watch, showing negative yielding corporate bonds in the hands of investors exploding from zero to US$ 1.2 trillion in the first eight months of this year.

Negative yield corporate bonds: Market Watch

When a recession occurs, the principal tool in the hands of a central bank to promote recovery is lowering interest rates.  But conventional wisdom among analysts used to be that when rates were already close to zero, there “weren’t any arrows left in the quiver” because “rates can’t go negative”.  Well, it appears they can, because they have.

Now, I guess the question is how far into negative territory they can go.  If a recession sets in over the next year, I suppose we’ll see.

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Author: John Walker

Founder of Ratburger.org, Autodesk, Inc., and Marinchip Systems. Author of The Hacker's Diet. Creator of www.fourmilab.ch.

21 thoughts on ““Take my money. Please—I’ll pay you!””

  1. ?So is there any way to figure out just WHO holds these bonds. My suspicion is that a lot of national banks hold them, as the surety  for their currency. I would be more surprised to find real investors buying these.

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  2. Devereaux:
    So is there any way to figure out just WHO holds these bonds? My suspicion is that a lot of national banks hold them, as the surety  for their currency. I would be more surprised to find real investors buying these.

    Most institutions report their percentage of government bond holdings, but I don’t know in what detail they have to go in terms of average maturity, mark to market vs. face value, etc.  It used to be that if they assumed the bond was held to maturity they didn’t have to mark to market but could carry it at face value, but that may have changed post-2008.

    I suspect that a large fraction of this US$ 15 trillion outstanding consists of bonds which had a positive yield when they were bought but now, if marked to market and sold, would bear negative yield.  (In other words, they weren’t directly bought at negative yield, but have appreciated since purchase so they now have negative yield.)  But still, in Europe, we see new bonds sold at negative yield and central banks charging to hold cash balances.

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  3. Do you think it was intentional when Trump mentioned zero interest “or less” last week?

    This is terrifying and I’m outta my league discussing financial issues.  If you think about it, is there any reason banks shouldn’t charge, instead of paying, for holding money?  Oh I don’t even know what to ask next…..l

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  4. Hypatia:
    Do you think it was intentional when Trump mentioned zero interest “or less” last week?

    Yep—they’re realising that with the federal funds rate at 2.25% they don’t have the maneuvering room to pump money into the system to counter a recession that they have historically had at the start of previous recessions.  Here is the federal funds rate from 1954 through the present, courtesy of the St Louis Fed’s FRED.

    Federal Funds Rate, 1954 to September 2019

    Recessions are highlighted in grey.  As you can see, the present fed funds rate is closer to the historical response to a recession than the rate at its beginning.  Consequently, a cut typical of past recessions would go into negative territory.

    In early September, former Fed chairman Alan Greenspan said of negative interest rates, “You’re seeing it pretty much throughout the world.  It’s only a matter of time before it’s more in the United States.”  I look at this and Trump’s statement as preparation of the battle space for negative interest rates in the U.S. when the next recession starts.

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  5. John Walker:
    (For some reason, the alternative of simply ordering up a pallet of high-denomination bills from the central bank and putting them in the vault doesn’t seem to occur to these people, or is considered beneath their dignity.)

    Or, maybe it is a decision based on the costs of providing protection, maintenance and insurance for the vault.

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  6. And while our current after-tax dollars are being shrunken for us by banks, the latter are lending them to the government at positive interest rates in unprecedented quantities. This will, of course translate into future tax increases to pay interest on the debt. Seems somehow like a monetary version of an ouroboros. It’s definitely serpentine. In this setting, I am even happier I began owning barbarous relics in the 200’s.

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  7. I recently fell asleep to an otherwise pleasant speech by Bernanke from several years ago.  It was a strange mix of I Told You So and “I got a bad feeling about this, Chewie.”

    In his defense, he did tell us so.

    I’ll dig up a link in a bit — I read a story (this is what led me to the speech by Central Bernank) which used the magnificent phrase “the everything bubble”, which showed the relation between otherwise unfathomable negative rates and the inherent worthlessness of everything stacked against it.  Gee, when you put it that way, who wouldn’t take the deal?

    Here’s my uninformed take:

    The negative interest rates are a CAUSE:  They are intended to terrify savers into keeping that money out in the risk pool, no matter how bad the risk gets.  This is the subprime everything.  Now that the government has control of all of your money, it can force you to put it here or put it there.  Like ObamaCare, they can now command you to buy this or that.  The supposed justification is that you now own this or that.  Spam, spam, spam, spam subprime dollar futures and spam.

    The negative interest rates are an EFFECT: The dollar is flashing red worthless,  and holding them is considered more hazardous than beneficial.  Negative rates are what gets charged on liabilities, not assets.  “Can I borrow a hundred bucks?  I’ll pay you back ninety a year from now.”  This is only a good deal if I fear losing more than ten percent just for holding onto the dollars for a year.  Whether I am 100% CERTAIN that I will lose more than ten percent (say, I have a religious belief that the dollar will drop fifteen percent in one year), or if I am just fifteen percent certain that the dollar will crash utterly, each of these fears of mine present me an expected value of minus fifteen dollars for holding onto my hoard, but only a ten dollar loss if I loan them to you for the same term (sucker).

    The Fed is unzipping to piss all over the dollar, and anybody standing too close to one.

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  8. MJBubba:

    John Walker:
    (For some reason, the alternative of simply ordering up a pallet of high-denomination bills from the central bank and putting them in the vault doesn’t seem to occur to these people, or is considered beneath their dignity.)

    Or, maybe it is a decision based on the costs of providing protection, maintenance and insurance for the vault.

    I did some research on asset storage costs.

    To store US$ 1 million in assets in an ultra-high security vault in the Swiss Alps (think Bond villain bunker, NBC proof), including storage, insurance, documentation, and access on demand, costs US$ 12079 per year, assuming a three year storage contract and that the assets are compact (for example, gold, precious stones, jewelry, negotiable securities, etc., but not your rare Ferrari).  This works out to an effective “negative interest rate” of 1.2% per year on the stored assets, so as long as the negative interest rate on the bonds is less than this, you’re better off with the bonds.

    I would expect storage fees to be less at lower security facilities, such as the vaults of money centre banks, although you may pay a bit more for insurance.

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  9. John Walker:
    I would expect storage fees to be less at lower security facilities, such as the vaults of money centre banks, although you may pay a bit more for insurance.

    Or if the insurance costs more than the differential expected value hit, go bareback.

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  10. Hypatia:
    If you think about it, is there any reason banks shouldn’t charge, instead of paying, for holding money?

    This is a good question, and it relates to the ownership of your money.  You see, in most accounts, when you deposit your money, you no longer own it.  You only have a right to access it, which is different.  The difference arises when it’s no longer there.

    When the bank owns it, they pay you installments.  I’m not against the fractional reserve system etc.  Just pointing out that the whole reason the FDIC exists is that you don’t own the money in your account, with some exceptions.  I don’t know what those exceptions are.  I just know they exist.

    I’m not even against the FDIC!  This is a fairly sound use of government — acting as a counterbalance out on the far end of a risk lever — with the power to compel compliance sufficient to make the system work.  So one reason the Fed gets to set interest rates is to slow things down so that the afore-mentioned balanced levers don’t get moving out of parameter and become an FDIC trebuchet.

    We should ideally have companies doing this — and we do — but a democracy depends upon mass support, and keeping the masses insulated from the vagaries of sophisticated shenanigans is always going to attract mass support.  While this is across an ideal ideological line, it’s safely on this side of a functional line.  That line is the difference between using government to protect the minority stake of the majority of holders, vs using government to compel that the majority stake of the minority of holders be redistributed.  It’s the difference between preventive vice proactive measures.

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  11. Haakon Dahl:
    I recently fell asleep to an otherwise pleasant speech by Bernanke from several years ago.  It was a strange mix of I Told You So and “I got a bad feeling about this, Chewie.”

    In his defense, he did tell us so.

    I’ll dig up a link in a bit — I read a story (this is what led me to the speech by Central Bernank) which used the magnificent phrase “the everything bubble”, which showed the relation between otherwise unfathomable negative rates and the inherent worthlessness of everything stacked against it.  Gee, when you put it that way, who wouldn’t take the deal?

    Here’s my uninformed take:

    The negative interest rates are a CAUSE:  They are intended to terrify savers into keeping that money out in the risk pool, no matter how bad the risk gets.  This is the subprime everything.  Now that the government has control of all of your money, it can force you to put it here or put it there.  Like ObamaCare, they can now command you to buy this or that.  The supposed justification is that you now own this or that.  Spam, spam, spam, spam subprime dollar futures and spam.

    The negative interest rates are an EFFECT: The dollar is flashing red worthless,  and holding them is considered more hazardous than beneficial.  Negative rates are what gets charged on liabilities, not assets.  “Can I borrow a hundred bucks?  I’ll pay you back ninety a year from now.”  This is only a good deal if I fear losing more than ten percent just for holding onto the dollars for a year.  Whether I am 100% CERTAIN that I will lose more than ten percent (say, I have a religious belief that the dollar will drop fifteen percent in one year), or if I am just fifteen percent certain that the dollar will crash utterly, each of these fears of mine present me an expected value of minus fifteen dollars for holding onto my hoard, but only a ten dollar loss if I loan them to you for the same term (sucker).

    The Fed is unzipping to piss all over the dollar, and anybody standing too close to one.

    I once asked a friend just why the dollar continues to be the coin of international exchange. His response,

    “We’re the best looking horse in the glue factory.”

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  12. Devereaux:

    Haakon Dahl:
    I recently fell asleep to an otherwise pleasant speech by Bernanke from several years ago.  It was a strange mix of I Told You So and “I got a bad feeling about this, Chewie.”

    In his defense, he did tell us so.

    I’ll dig up a link in a bit — I read a story (this is what led me to the speech by Central Bernank) which used the magnificent phrase “the everything bubble”, which showed the relation between otherwise unfathomable negative rates and the inherent worthlessness of everything stacked against it.  Gee, when you put it that way, who wouldn’t take the deal?

    Here’s my uninformed take:

    The negative interest rates are a CAUSE:  They are intended to terrify savers into keeping that money out in the risk pool, no matter how bad the risk gets.  This is the subprime everything.  Now that the government has control of all of your money, it can force you to put it here or put it there.  Like ObamaCare, they can now command you to buy this or that.  The supposed justification is that you now own this or that.  Spam, spam, spam, spam subprime dollar futures and spam.

    The negative interest rates are an EFFECT: The dollar is flashing red worthless,  and holding them is considered more hazardous than beneficial.  Negative rates are what gets charged on liabilities, not assets.  “Can I borrow a hundred bucks?  I’ll pay you back ninety a year from now.”  This is only a good deal if I fear losing more than ten percent just for holding onto the dollars for a year.  Whether I am 100% CERTAIN that I will lose more than ten percent (say, I have a religious belief that the dollar will drop fifteen percent in one year), or if I am just fifteen percent certain that the dollar will crash utterly, each of these fears of mine present me an expected value of minus fifteen dollars for holding onto my hoard, but only a ten dollar loss if I loan them to you for the same term (sucker).

    The Fed is unzipping to piss all over the dollar, and anybody standing too close to one.

    I once asked a friend just why the dollar continues to be the coin of international exchange. His response,

    “We’re the best looking horse in the glue factory.”

    Rather than equine, my own thinking slides toward porcine lip emollients.

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  13. Haakon Dahl:
    This is a good question, and it relates to the ownership of your money.  You see, in most accounts, when you deposit your money, you no longer own it.  You only have a right to access it, which is different.  The difference arises when it’s no longer there.

    Banking started out as a warehousing operation.  To avoid the risk of theft, people with excess precious metal coins would deposit them with a trusted custodian (often, in the early days, a jeweler who already had a secure vault for storing their own inventory) and receive a warehouse receipt for the deposit.  On presentation of the receipt, they’d get the indicated number of coins back (but not necessarily the same ones they deposited).  Within the area where the custodian was known, people found that paying for things by exchanging these warehouse receipts was more convenient that actually delivering the physical coins.  This was the origin of paper money, before the Fall from Grace.  In “warehouse banking” the depositor paid a fee to the bank to store and safeguard the deposit.

    The next step was when the warehouse realised that all of that stored money could be used to generate revenue by loaning it out at interest.  This is the origin of “fractional reserve”, meaning that there are more warehouse receipts out there than coins actually in the vault.  Originally, there was a clear distinction between “demand deposits” which could be withdrawn at any time, where the warehouse was required to keep the coins on hand and the depositor paid, and “time deposits” which could only be withdrawn at specified intervals, but usually paid interest to the depositor.  You deposits your money, and you makes your choice.

    Swiss banks still have this distinction.  A “current account” is available for full withdrawal at any time and usually has a small fee, charged as a percentage of assets, for maintenance.  A “deposit account” has limits on withdrawals, based on time or amount over time, and pays interest.  There is nothing to prevent the bank from loaning out the funds deposited in a current account—it is still a fractional reserve system—but in the classic Swiss private banking system the directors and officers of the bank were personally liable, without limitations, for losses by depositors who did not receive their funds on demand or at maturity of their time deposits.  This is why Swiss banks have such a reputation for conservatism in lending policies, which is sometimes expressed as “A Swiss bank will be happy to lend you any amount of money as long as you have more than that amount on deposit with them.”

    There are only a few of these classic private banks left.  Most of them have been re-organised as limited liability corporations, under the pressure of regulators who consider the “transparency” afforded by such a structure advantageous.

    An excellent introduction to the history of banking is Murray Rothbard’s What has Government Done to Our Money?.

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  14. Hmmm. ?Was there a specific time “banking” started. I recollect that the Templars made quite the reputation by taking in money and giving a chit, which the person then could collect from any Templar church. It allowed Medevil travellers, often beset by robbers, to travel without all the wealth to be stolen and just collect their money at their destination or close by.

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  15. Devereaux:
    Was there a specific time “banking” started? I recollect that the Templars made quite the reputation by taking in money and giving a chit, which the person then could collect from any Templar church.

    The Templars offered a money transfer service across Europe from around A.D. 1100 to 1300.  The emergence of banking as we now think of it is generally dated to twelfth century Italy.  The Bank of Venice was founded then, and accepted deposits, made loans, and changed foreign currencies.  The practices of the issuance of paper money backed by deposits in a bank and fractional reserve banking emerged in the 17th century and rapidly spread throughout Europe.  The first central bank, the Bank of England, was founded in 1694—it was the first to issue printed banknotes.  Although nominally a private institution, it had a monopoly on holding the government’s accounts and on issuing banknotes (paper money).

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  16. Herr Walker –

    The obvious answer to negative interest rates is a full reserve bank with physical storage of currency or other assets one wishes to deposit.  Do you know if it is even legal to start a bank in the US which has no need of deposit insurance?

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  17. Dave:
    Herr Walker –

    The obvious answer to negative interest rates is a full reserve bank with physical storage of currency or other assets one wishes to deposit.  Do you know if it is even legal to start a bank in the US which has no need of deposit insurance?

    How would this institution generate revenue?  It’s just a glorified self-storage joint, which must charge fees.  Also called negative interest.

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  18. Dave:
    The obvious answer to negative interest rates is a full reserve bank with physical storage of currency or other assets one wishes to deposit.  Do you know if it is even legal to start a bank in the US which has no need of deposit insurance?

    I have tried to answer this question and found contradictory statements as to whether FDIC membership is required for U.S. banks.  The FDIC’s Web site is, as far as I can determine, silent on the issue, but seems to imply that all U.S. banks are, in fact, members.

    I think that if you wanted to start a full-reserve bank today, you’d have every incentive to organise it so that it would not be defined as a bank for regulatory purposes, because that would trigger extremely costly overhead (which has driven consolidation of small, independent banks for decades, but especially after Dodd-Frank in 2010).  Ideally, you’d want to structure the company as something like Goldmoney in Canada, which provides segregated, full-reserve storage of gold and silver bullion and a debit card backed by a customer’s gold holdings.  If you could navigate the rapids to avoid being called a bank, but rather a warehousing operation, this might be feasible.  You’d still need insurance, of course, but this would be conventional asset insurance.  In comment #8, I discussed how much a real world private non-bank vault company charges all-up for such services.

    The Bank of Amsterdam originally was a full reserve bank.  It accepted deposits of gold and silver bullion and would issue receipts at a discount of around 5% from the value deposited.  These receipts were used as money, and could be redeemed for coin or bullion by the bearer.  Depositors paid a fee for storage and insurance of 0.25% for sliver and 0.5% for gold every 6 months.  After 1657, the bank switched to a fractional reserve regime and, predictably eventually went blooie in 1790.

    Interestingly, yesterday I was talking to a banker from one of the large Swiss private banks and the topic of storing cash in the vault as opposed to negative yield bonds came up.  He said that this was actually beginning to become a thing, with some corporate treasuries and HNWI family offices dipping their toe into the concept.  If we go further into the negative interest rate regime and, in particular, if the U.S. ventures there (which he considered “unthinkable”), this may become more common.

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