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Bill Greiner
Forbes - 3/12/2015
"Nega-Coups" And The Implications Of Negative Interest Rates On The Global Economy - Forbes
Forbes - 3/12/2015
"Nega-Coups" And The Implications Of Negative Interest Rates On The Global Economy - Forbes
What do you call a bond which carries a negative interest rate? It’s called a “nega-coup,” short for negative coupon. Negative coupons, or interest rates on bonds, is a rather novel reality in today’s sovereign debt (government backed) market. These are government bonds (mostly issued in Europe and Japan) where the investor is guaranteed to lose money if the bond is held to maturity.
Let me give an example.
Currently, German two-year government bonds are yielding -0.21%. If an investor purchased $10,000 of these bonds, they would receive $9,958 back in two years. That return is guaranteed by the German government. Recently, interest rates out to nine years were negative in Switzerland. Germany’s rates were negative out to six years, Denmark out to five years, and Sweden out four years.
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Nega-coups are not new. Certain interest rates in Sweden were negative from 2009 – 2010. The same was true in Denmark from 2012 – 2014, and now Germany, Finland and Switzerland all are issuing bonds with negative attached interest rates. According to the Wall Street Journal, 16% of all outstanding government bonds (on a global level) currently carry negative yields.
The nega-coup concept violates a long-held economic presumption that interest rates cannot go below 0%. Why? In theory, if an investor has to pay someone to simply “hold” their money, the investor will forgo savings and increase consumption as their wealth is bound to decline in the future. That is the theory…which has now gone out the window.
Why Negative Interest Rates Are Happening
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Let me give an example.
Currently, German two-year government bonds are yielding -0.21%. If an investor purchased $10,000 of these bonds, they would receive $9,958 back in two years. That return is guaranteed by the German government. Recently, interest rates out to nine years were negative in Switzerland. Germany’s rates were negative out to six years, Denmark out to five years, and Sweden out four years.
[.......]
Nega-coups are not new. Certain interest rates in Sweden were negative from 2009 – 2010. The same was true in Denmark from 2012 – 2014, and now Germany, Finland and Switzerland all are issuing bonds with negative attached interest rates. According to the Wall Street Journal, 16% of all outstanding government bonds (on a global level) currently carry negative yields.
The nega-coup concept violates a long-held economic presumption that interest rates cannot go below 0%. Why? In theory, if an investor has to pay someone to simply “hold” their money, the investor will forgo savings and increase consumption as their wealth is bound to decline in the future. That is the theory…which has now gone out the window.
Why Negative Interest Rates Are Happening
[........]
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