by tonytran2015 (Melbourne, Australia).
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(Blog No. 3xx).
People buy US Treasury Bond with negative interest rates when they pay more than USD100 today so that they can be paid USD100 few years later by US government. Why do they do that? Why don’t they just keep the money in their safes?
#negative interest rate, #treasury bonds, #inversion of interest rate,
1. Why do people buy Treasury Bonds with Negative Interests ?
1/- Foreigners buy US Treasury Bond at higher than its face value (e.g. paying USD101M to buy a US Treasury Note paying them back USD100M after ten years) when their local laws prohibit possession of US dollars but permit possession of long term US Treasury Notes (as an investment device).
2/- US residents inside USA do that when the cost of safe keeping the money is higher than the loss through Negative Interest rate.
The cost of safe keeping the money at home includes the cost of buying the safe, buying the building to contain the safe, maintenance of the building and hiring of security guards.
Alternatively, depositing the money with a bank may incur account keeping fee, which may be comparable to negative interest rate (Banque National de Paris did have that kind of account keeping fees in the 1960’s) as well as a risk of banks defaulting on cash deposits.
3/- They do it when there is a threat that all their uncommitted fiat money would be confiscated or punitively slapped with some “taxes on idling money” or that their deposits would be slapped with a yearly percentage of “government deposit guarantee taxes”.
Confiscation of idling money is often considered too remote a threat but many governments had previously forced their citizens to purchase their (junk grade) Treasury Bonds with uncommitted money.
Taxes on idling money is in the same category as “taxes on vacant bedrooms” in London or taxes on vacant shops by some ever-growing, tax-addicted local governments.
4/- They do it when there is a prospect of high deflation in USA, that means USD100 in the future would probably buy people much more goods than USD100 of today.
2. Prices of Treasury Notes do depend on many other factors beside bubble markets.
With the above first three reasons, it is obvious that a lower interest rate on 10 year Treasury Bond compared to a 2 year interest rate does not necessarily indicate a coming crash of the economy.
If the prices of Treasury Bonds are free from the above two factors, a lower interest rate on 10 year Treasury Bond compared to a 2 year interest rate indicates that the economy is only good for the next two years but it may not remain that good for much longer. Companies would be wise to wind down themselves to get prepared for a next new phase of the economy. However lower interest rate on 10 year Treasury Bond compared to a 2 year interest rate is not a sufficient condition for an economic crash.
It appears the panic from the current “inversion of yield curve” is only a play staged by investment houses (with little objection by the FRB). If the share markets crash investment houses can make fortunes.
Added after 2019 Aug 23:
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Your fiat money (Part 2), Your fiat money, Bankers given outrageous incomes by their boards, Signs pointing to an impending crash for small investors, Bankers earn more than interest margin on secured loans.
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