cancel
Showing results for 
Search instead for 
Did you mean: 
     
Highlighted
Contributor ○○○

Re: Negattive Interest Rate Environment

Yes but letting the Treasury hold it protects against thieves. Well wait a minute...there are thieves everywhere.


@ElLobo wrote:

@yogibearbull wrote:

Schwab thinks that the next 3-mo T-Bill auction on Monday, March 23 may produce negative rate - that is, 3-mo T-Bill may be sold at a slight premium instead of discount from par.


Twill be interesting.  I'm not sure why anyone would want to buy a 3 or 6 month T-bill, sending $1008 or $1016 into the Treasury and getting a guaranteed $1000 back later this year!  Put it into a Mason jar underneath your front porch!


 

0 Kudos
Highlighted
Contributor ○○○

Re: Negattive Interest Rate Environment


@Learner wrote:

@ElLobo wrote:

@yogibearbull wrote:

Schwab thinks that the next 3-mo T-Bill auction on Monday, March 23 may produce negative rate - that is, 3-mo T-Bill may be sold at a slight premium instead of discount from par.


Twill be interesting.  I'm not sure why anyone would want to buy a 3 or 6 month T-bill, sending $1008 or $1016 into the Treasury and getting a guaranteed $1000 back later this year!  Put it into a Mason jar underneath your front porch!


I agree that an individual investor with limited funds may not want it (unless selling before maturity for profit is a consideration0.  When it comes to much larger investment entities, it might be relatively attractive for them since a Mason jar underneath their front porch is not an option.


Large or small, why pay the government interest for safety?  BIg corporations have overnight lending for their spare cash.  Individuals have money market accounts, or CDs!  Anyhow, we'll see, I guess.

0 Kudos
Highlighted
Participant ○○

Re: Negattive Interest Rate Environment

Big corporations may have too much cash and not enough borrowers with good credit.  Some mutual funds have money in them too as their prospectus requires.  It is an option for governments of some countries with huge amounts of funds too.  Even an individual with tens or hundreds of millions of dollars might not have CDs as an option short of entering a costly arrangement or spreading money over hundreds of financial institutions not to exceed $250K.

I suppose you don't mean that big investors (governments, corporations, mutual funds, very rich individuals) don't know what they are doing.

0 Kudos
Highlighted
Valued Contributor

Re: Negattive Interest Rate Environment

M-mkt funds will soon be near 0% as ZIRP is here, 3-mo T-Bills may go negative, the Fed or Treasury is thinking of 2008-10 era federal insurance again for m-mkt funds for a few bps [was 10 bps back then]. There are massive outflows from retail prime m-mkt funds [subject to sudden redemption fees and/or gates] and muni m-mkt funds [panic less clear there], and massive inflows into gov m-mkt funds.

Only banks do overnight lending with each other in the fed funds market. Corporations are stuck with regular channels [T-Bills, CDs, institutional prime m-mkt funds with floating NAV]. Even Buffett/BRK has much of $128 billion in T-Bills. This environment explains possible negative rate for 3-mo T-Bills at Mon auction - sure, it doesn't make sense for individuals.

YBB
0 Kudos
Highlighted
Participant ○○○

Re: Negattive Interest Rate Environment


@yogibearbull wrote:

<snip>

Only banks do overnight lending with each other in the fed funds market. Corporations are stuck with regular channels [T-Bills, CDs, institutional prime m-mkt funds with floating NAV]. Even Buffett/BRK has much of $128 billion in T-Bills. This environment explains possible negative rate for 3-mo T-Bills at Mon auction - sure, it doesn't make sense for individuals.


Hi Yogi,

Treasury bills (maturity less than 1-year) aren't priced by "discounting the coupon" because they don't pay any. Bills are sold at a discount to PAR value; they are zero-coupon bonds.  Try wrapping your head around that arithmetic. How much do I pay for $100 (or $1,000,000) in face value to achieve a yield of 0.01%? 

A 1 penny gain after 1 year. It makes my hair hurt.

Thank you,

Holiday

0 Kudos
Highlighted
Valued Contributor

Re: Negattive Interest Rate Environment


@Holiday wrote:

@yogibearbull wrote:

<snip>

Only banks do overnight lending with each other in the fed funds market. Corporations are stuck with regular channels [T-Bills, CDs, institutional prime m-mkt funds with floating NAV]. Even Buffett/BRK has much of $128 billion in T-Bills. This environment explains possible negative rate for 3-mo T-Bills at Mon auction - sure, it doesn't make sense for individuals.


Hi Yogi,

Treasury bills (maturity less than 1-year) aren't priced by "discounting the coupon" because they don't pay any. Bills are sold at a discount to PAR value; they are zero-coupon bonds.  Try wrapping your head around that arithmetic. How much do I pay for $100 (or $1,000,000) in face value to achieve a yield of 0.01%? 

A 1 penny gain after 1 year. It makes my hair hurt.

Thank you,

Holiday


Yes, T-Bills are typically sold at discount from par, so there is a (positive) discount rate [from par] and (positive) coupon equivalent rate [from purchase price]. But if 3-mo T-Bill is issued at price above par, then both discount rate and coupon equivalent rate will be negative. Standard interest rate calculators for PV, FV, A, i%, n will work [they may fail sometimes at 0% as that isn't programmed as exception there].

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=b...

YBB
0 Kudos
Highlighted
Participant ○○

Re: Negattive Interest Rate Environment

As of 3/21/20...

7-day SEC yield for Vanguard Prime Money Market Fund        1.37%  (Compound yield  1.38%)

7-day SEC yield for Vanguard Federal Money Market Fund      1.02%  (Compound yield 1.02%)

$10K investment            $36 difference in one year          Less after taxes

$50K investment            $180 difference in one year        Less after taxes

$100K investment          $360 difference in one year        Less after taxes

0 Kudos
Highlighted
Contributor ○○○

Re: Negattive Interest Rate Environment

"Yes, T-Bills are typically sold at discount from par, so there is a (positive) discount rate [from par] and (positive) coupon equivalent rate [from purchase price]. But if 3-mo T-Bill is issued at price above par, then both discount rate and coupon equivalent rate will be negative. Standard interest rate calculators for PV, FV, A, i%, n will work [they may fail sometimes at 0% as that isn't programmed as exception there]."

The question still is what incentive does anyone have to buy Tresuries above par?

0 Kudos
Highlighted
Participant ○○○

Re: Negattive Interest Rate Environment


@ElLobo wrote:

"Yes, T-Bills are typically sold at discount from par, so there is a (positive) discount rate [from par] and (positive) coupon equivalent rate [from purchase price]. But if 3-mo T-Bill is issued at price above par, then both discount rate and coupon equivalent rate will be negative. Standard interest rate calculators for PV, FV, A, i%, n will work [they may fail sometimes at 0% as that isn't programmed as exception there]."

The question still is what incentive does anyone have to buy Tresuries above par?


Hi El,

Why?

Treasury bonds are more liquid (for reinvestment purposes) than cash burred in the back yard. You may be guaranteed a loss but that loss is known ahead of time unlike what could happen if you have it invested in stocks.  It is a place to store dry powder.

If you buy physical gold, you loose on the spot price when the dealer takes his cut so at that instant, you are guaranteed a negative yield too. How about savings or checking accounts that pay squat and charge service fees? The yield on some of them have been negative too.

FDIC insured CD's are a reasonable place to store cash while waiting it out, and the Total Return is known at purchase.

Holiday

0 Kudos
Highlighted
Participant ○○○

Re: Negattive Interest Rate Environment

El Lobo, any institution that needs to insure some level of liquidity has to buy 3 month TBills. Every bank account, money market, CD has to be backed by something and TBills are the only market large and safe enough to support that, at least as long as the Treasury can print unlimited dollars. That's why every safe investment is going to near zero yield in the near future.

Heck, I-Bonds current 0.2% minimum guaranteed fixed rate might end up being the deal of the decade!

 

0 Kudos
Highlighted
Contributor ○○○

Re: Negattive Interest Rate Environment


@DJANG0 wrote:

El Lobo, any institution that needs to insure some level of liquidity has to buy 3 month TBills. Every bank account, money market, CD has to be backed by something and TBills are the only market large and safe enough to support that, at least as long as the Treasury can print unlimited dollars. That's why every safe investment is going to near zero yield in the near future.

Heck, I-Bonds current 0.2% minimum guaranteed fixed rate might end up being the deal of the decade!

 


Even I-Bonds and TIPS don't have a negative yield during deflation!  8-))

Still haven't heard any incentive for anyone to pay the government interest to buy their debt.  Certainly as far as individual, retail investors are concerned, let alone sopnisticated moneymen/women!  I can, BTW, see negative REAL interest rates, as all current government debt happens to be, with inflation above 2%!

@Holiday 

I'm not talking about 'risky' investments, compared to risk free cash, and I'm not thinking of the cost of ownership.  If liquidity is a concern, therefore the reason, instead of buying the 6 month T-bill, I'd go out in term, or buy on the secondary market, the first and shortest term Treasury paying a positive yield.

0 Kudos
Highlighted
Valued Contributor

Re: Negattive Interest Rate Environment

^IRX, 3-mo T-Bill discount [really premium] from par is -0.03 as the 3-mo T-Bill auction today is expected to have negative rate.   https://finance.yahoo.com/quote/%5EIRX?p=^IRX

YBB
0 Kudos
Highlighted
Valued Contributor

Re: Negattive Interest Rate Environment


@Gary1952 wrote:

Yes but letting the Treasury hold it protects against thieves. Well wait a minute...there are thieves everywhere.


@ElLobo wrote:

@yogibearbull wrote:

Schwab thinks that the next 3-mo T-Bill auction on Monday, March 23 may produce negative rate - that is, 3-mo T-Bill may be sold at a slight premium instead of discount from par.


Twill be interesting.  I'm not sure why anyone would want to buy a 3 or 6 month T-bill, sending $1008 or $1016 into the Treasury and getting a guaranteed $1000 back later this year!  Put it into a Mason jar underneath your front porch!


 


That doesn’t have to happen. Treasury can issue the bonds with a small positive rate which will be purchased by the federal reserve which will expand its balance sheet. 80% of the interest received by the fed would be returned to the treasury. Eventually the fed would sell the bonds to banks who would pay cash and fed would reduce its balance sheet.

0 Kudos
Highlighted
Explorer ○○○

Re: Negattive Interest Rate Environment

Hi YBB.

Sitting here confined and not much to do, I have been reading some if these posts. I do not understand 90% of what all has bees said here so far, but one question. How will the insurance co. be able to pay the promised rates on their annuities if negative rates become the new norm? Invest in stocks? They then assume the same risk I do?  

0 Kudos
Highlighted
Valued Contributor

Re: Negattive Interest Rate Environment


@NuEnglander wrote:

Hi YBB.

Sitting here confined and not much to do, I have been reading some if these posts. I do not understand 90% of what all has bees said here so far, but one question. How will the insurance co. be able to pay the promised rates on their annuities if negative rates become the new norm? Invest in stocks? They then assume the same risk I do?  


The investments that life insurance companies can make are regulated by state insurance laws. In general at least 60% of the reserves must be invested in conservative investments such as bonds and RE. It would be up to state legislatures and insurance regulators to make changes in what classes of assets  life insures can invest in if low rates persist. 

0 Kudos
Highlighted
Valued Contributor

Re: Negattive Interest Rate Environment


@Holiday wrote:

@yogibearbull wrote:

<snip>

Only banks do overnight lending with each other in the fed funds market. Corporations are stuck with regular channels [T-Bills, CDs, institutional prime m-mkt funds with floating NAV]. Even Buffett/BRK has much of $128 billion in T-Bills. This environment explains possible negative rate for 3-mo T-Bills at Mon auction - sure, it doesn't make sense for individuals.


Hi Yogi,

Treasury bills (maturity less than 1-year) aren't priced by "discounting the coupon" because they don't pay any. Bills are sold at a discount to PAR value; they are zero-coupon bonds.  Try wrapping your head around that arithmetic. How much do I pay for $100 (or $1,000,000) in face value to achieve a yield of 0.01%? 

A 1 penny gain after 1 year. It makes my hair hurt.

Thank you,

Holiday


A 1 cent return on fixed income is one big reason why investors are fleeing bonds. I prefer higher yielding dividends from companies with good balance sheets and more than adequate cash flow like VZ with a 5% dividend.

0 Kudos
Highlighted
Valued Contributor

Re: Negattive Interest Rate Environment

Auction results are in. The 3-mo T-Bill was at 0%.   https://www.treasurydirect.gov/instit/annceresult/press/preanre/2020/R_20200323_2.pdf

YBB
0 Kudos
Highlighted
Valued Contributor

Re: Negattive Interest Rate Environment


@yogibearbull wrote:

Auction results are in. The 3-mo T-Bill was at 0%.   https://www.treasurydirect.gov/instit/annceresult/press/preanre/2020/R_20200323_2.pdf


It’s interesting that the amount tendered by buyers for the bonds was 3X the amount of bonds that were issued. 45B in Bonds were issued at no cost to the Treasury. Free money.

0 Kudos
Highlighted
Participant ○○

Re: Negative Interest Rate Environment

intruder, in the past, you mentioned that you live in NJ.  ECEPROF mentioned his son and his family in Chicago.  Stay safe.  Same wish for everyone, especially for those who live in high-risk areas.  In such situations, we are all united.  I hope all of you, your families, and the humanity will leave these difficult days behind us with minimum possible loss.

0 Kudos
Announcements

Morningstar is here to help you respond to the Coronavirus crisis.