c) they are obliged to do so
Pension fund managers have fiduciary duties to their beneficiaries. Are they buying negative interest bonds because they're a) fools hoping to sell to greater fools, playing Russian roulette with beneficiaries' money, or b) prevented by regs from putting more funds in cash?https://twitter.com/TuurDemeester/status/1162070156916535296 …
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By what, if not regulations?
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no formal regulations, but via political pressure by the Fed
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How does that work? If I am a pension manager what obliges me to follow bad advice from the Fed?
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These assets may have a utilitarian function in that they are viewed as collateral that can ‘back’ riskier assets. Basel III obliges certain financial institutions to buy them for this reason. In a sense the system has contrived that sovereigns should play the role gold once did.
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Indeed, another source of regulations under (b).
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Could mean they believe in deflation going forward.
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In that case they would garner a positive real return for their beneficiaries. With either inflation or deflation or neither cash is 100% guaranteed to have a higher return than negative interest bonds when the greatest fool is holding the bonds at maturity.
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I think the issue is that a government is less likely to fail than an individual bank so it's seen as lower risk and has a lower return as a result. That's the logic anyways. My opinion: the bond market is in a massive bubble. Don't touch it!
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That suggests that bank deposits in Europe have a sizable risk premium. I wonder if there is a way to compare the level of this risk premium from prior years with higher interest rates, and if the growth of negative interest rates indicates the risk of bank failures is growing.
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It's also possible that the premium isn't altogether rational. I suppose that you could compare historical interest rates for savings accounts and bonds adjusted for inflation.
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But LenderLastResort typically steps in in case of depository failure, so we are back to betting on the government in either case right? Anyone have data on sales of vaults and safes over time?
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EUR cash at a custodial bank earns negative 60bps currently, so buying a negative yielding bond with greater duration is still an improvement.
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And why are the banks doing that? Something to do with coercive ECB monetary policy perhaps? Why not switch bank accounts or bonds in other major country currencies that don't charge negative interest?
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Precisely. Banks penalised for cash and it is passed on. If a European or Japanese client switches currencies to USD, they then have an expensive currency hedge back to their base in EUR or JPY. Even a 30 year US treasury hedged to yen is negative yield currently.
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How about bond and income mutual funds that get automatic contributions from 401k or IRA accounts? They are required to buy them and participants may be a little slow to adjust their allocations.
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When it's harder to get your money out than to put it in, caution is advised. "Pray tell me, how do your visitors find their way out again?” https://fablesofaesop.com/the-fox-and-the-sick-lion.html …pic.twitter.com/24sa2YGiSh
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Option A is not necessarily as irresponsible as your tweet implies. There are some (like me!) Who genuinely believe bonds are more likely to rise with less volatility than other investment options
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That's speculation, not investment.
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I'm not sure what the difference is between those terms. I think though it can be a rational decision made in good faith, not a fiduciary violation or reckless risk taking
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