Thursday, December 11, 2008 3 comments ++[ CLICK TO COMMENT ]++

Japan faced an almost identical situation with negative yield bonds

The fact that "investors" are putting their money into T-bills with negative yields seems unique. Not quite. I did a Google search and came across an almost identical case in Japan in 1998. The specifics are a bit different but the scenario is similar. I suspect that the reasons cited in the Japan story justify the US case.

I'm going to take some liberty and quote the full news article (probably illegal to do so) because old stories may dissapear from the web:

(source: Negative rates hurt Japan. CNNfn, November 6, 1998)

Western banks are charging Japanese banks for the privilege of holding their yen deposits, in what one economist said was the "unprecedented" use of negative inter-bank interest rates.

In a further damaging sign of the extent of Japan's economic woes overseas banks such as Barclays Capital and JP Morgan have begun to charge negative nominal interest rates to Japanese banks for holding yen deposits.

"It was a big surprise to the market and to economists who have long held that nominal interest rates cannot fall to less than zero", said West LB Securities treasury economist Richard Hostetter.

"Japanese banks are essentially paying for banks to hold money for them. I don't think it has ever happened before in the history of the inter-bank market. I didn't think it could happen".

Japanese banks have been reluctant to deposit money with local institutions because of anxieties about solvency in the embattled local financial system.

With the stock market shaky and government bonds offering low yields, there are few other places for Japanese banks to put their money.

The Japanese press have been critical of Western banks for imposing negative rates on their local counterparts, but Hostetter disagreed that the fault lay with overseas institutions.

"It's a condemnation of what is going on with the financial situation", he said. "It's quite embarrassing for Japanese policy makers".

But Hostetter predicted the days of negative interest rates would prove short-lived. "There is a huge scramble for funds to cover the end of the year in many markets", he said. "It has started a bit earlier this year".

He added: "It is an unprecedented and bizarre situation but will probably not last for very long - probably for two or three weeks".

Tags: ,

3 Response to Japan faced an almost identical situation with negative yield bonds

December 11, 2008 at 8:50 PM

US rates are slightly negative because...

Banks don't want to lend. Fed/Tsy gives them billions. Everyone wants security over the year end. Everyone wants USD assets. Banks at least have their own custody business. Funds that have been selling for redemptions need the cash to be available and want to hold it as a security not loose cash that could be swept as a lot of Lehman clients got bent over that way. Even more painful for the funds is that they are paying their prime broker/custodian to hold Bills so the returns were already negative for them. A little more negative at the margin for them is offset by the utility of security.

December 11, 2008 at 10:10 PM

Wrt to YMM, I have said all I wanted to say about him. His public humiliation is complete, and there is no sense piling on.

As far as "trader mentality" goes, you are right in the sense I am pretty good at cutting my losses. One of the losses I am cutting is having an intelligent discussion with you about making money in the markets. For an amateur investor and a young person, you are remarkably certain about what works and not works in the markets.

I have been at this game for 20 years, and I am constantly evaluating and re-evaluating my conviction about anything related markets.

Unlike you I don't view conviction as a positive attribute. I view conviction as a negative attribute to making money. I also learned that perhaps there is season for any and every method for making money. Change is the only constant. The trick is to figure out when change is happening -- and adapt and survive with it.

This is going to be my last post. Good luck w/ your life and investment journey.

December 12, 2008 at 9:58 AM


What's your return this year? How about your liftime average?

Your answer to those questions, the latter in particular, will indicate how good your strategy is...

Post a Comment