How exactly does negative interest on government bonds work?

[kashirin]

Previously If I bought $1000 in 10y bond and interest was 1% every year I was paid $10

Now if interest rate -1% does that mean I need to pay to the government $10 every year to some special account?

What will happen if I don't pay? Does that mean I defaulted on Government bond?

 

[globalarbtrader]

Previously If I bought $1000 in 10y bond and interest was 1% every year I was paid $10

Now if interest rate -1% does that mean I need to pay to the government $10 every year to some special account?

What will happen if I don't pay? Does that mean I defaulted on Government bond?

No.

Bonds will be issued above par and pay zero coupons. Extreme example you pay $110 for a bond today and in one year get $100. Interest rate (flat rate) is -9%.

The mechanism you describe wouldn't work.

GAT

 

[doggyfx]

Why I just don't keep money in Dollars? Why I just can't keep it in a bank?
I really don't understand the purpose of investing in something that generate losses for you. We just lose the meaning of investing in this case, don't we?

 

[globalarbtrader]

Why I just don't keep money in Dollars? Why I just can't keep it in a bank?
I really don't understand the purpose of investing in something that generate losses for you. We just lose the meaning of investing in this case, don't we?

In the countries where this is happening banks are charging for large deposits. Also banks present counterparty risk. Governments don't (at least in their own currency for developed countries).

There are limits on how much physical cash you can hold. You need to pay for a strongbox and insurance.

There may end up being legal limits http://gainspainscapital.com/2015/10/08/governments-have-begun-moving-to-ban-physical-cash/

GAT

 

[schizo]

Why I just don't keep money in Dollars? Why I just can't keep it in a bank?
I really don't understand the purpose of investing in something that generate losses for you. We just lose the meaning of investing in this case, don't we?

The whole purpose of NIRP is to prevent banks from hoarding cash and, instead, force them to lend it to the broader economy. In theory, it sounds like a beautiful concept but it's damned flawed.

 

[Sig]

The whole purpose of NIRP is to prevent banks from hoarding cash and, instead, force them to lend it to the broader economy. In theory, it sounds like a beautiful concept but it's damned flawed.

How? I hear a lot of apocalyptic pronouncements surrounding negative interest rates but no specific list of ill effects. I'm sure there are some, but I haven't seen any specifics.

 

[eurusdzn]

Government debt, reserve, and other deposits at a little less than 0% may be a good
relative return compared to .....'fill in the blank' investment.
I read on ET that 95% cant do better. Cue for EMG .

 

[Maverick74]

The coupon rate is meaningless. US Treasuries generate a very handsome capital that dwarfs the return on the coupons. Anyone who has been long Treasuries has made a killing. Rates have to do down to reduce demand.

 

[kashirin]

The coupon rate is meaningless. US Treasuries generate a very handsome capital that dwarfs the return on the coupons. Anyone who has been long Treasuries has made a killing. Rates have to do down to reduce demand.

Fed bought $4.5 trln
it's all artificial


real demand Spain and Italy before Draghi which was 7% on 10Y

 

[Maverick74]

Fed bought $4.5 trln
it's all artificial


real demand Spain and Italy before Draghi which was 7% on 10Y

You are missing the point. It's a mathematical concept. Capital appreciation. It's mind boggling to me so many on ET don't understand these basic financial concepts.