tag:blogger.com,1999:blog-6704573462403312459.post2662485324905519908..comments2024-03-29T02:53:03.321-04:00Comments on Moneyness: Paul Krugman contemplates the lower boundJP Koninghttp://www.blogger.com/profile/02559687323828006535noreply@blogger.comBlogger5125tag:blogger.com,1999:blog-6704573462403312459.post-33482696283544862822015-03-24T19:15:14.227-04:002015-03-24T19:15:14.227-04:00I'd imagine that sovereigns may from time-to-t...I'd imagine that sovereigns may from time-to-time avoid new debt issuance, even at highly advantageous rates, because as you say, the political process is cumbersome. A corporation won't hesitate to issue new debt if it results in a profit, say by using the proceeds to buy back stock. The corporate decision-making process is much more straight forward than the political one.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-29259164651388619442015-03-24T08:51:50.965-04:002015-03-24T08:51:50.965-04:00Hi JP,
Firstly, great blog! Almost certainly my fa...Hi JP,<br />Firstly, great blog! Almost certainly my favourite.<br /><br />Before proceeding with my question, I should probably disclaim any real understanding of markets and monetary issues.<br /><br />That said, I was curious about why sovereign yields can fall below zero, but want to take it from a bond supply/issuance perspective. If there is no burning need for deficit reduction, as is usually the case in countries that can borrow in their own currency, issuing any sovereign debt implies a "real" profit for the government in charge. Why don't countries that can issue under these favourable terms milk it for all its worth i.e. keep issuing to finance public investment until they see yields move up and 0 profit. Especially since negative real yields usually suggest low growth/inflation expectations. <br /><br />Is it because the economics is contentious? Or because the political process can be cumbersome? Or am I missing something big altogether?<br /><br />Thanks!<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-61926035176462459832015-03-08T13:09:14.148-04:002015-03-08T13:09:14.148-04:00You use the example of a Nestle 2 1/2% which trade...You use the example of a Nestle 2 1/2% which trades with negative interest rates. I think you could look at this bond as if it were a call option with an unknown strike price.<br /><br />Here is my line of reasoning. It is possible to buy a call option on Nestle. The call option will give the owner the option of purchasing a share of Nestle stock at a strike price anytime during the effective time span of the option. It is easy to place a market value on such an option based on the trading price of the stock.<br /><br />A property secured bond has a similar characteristic in that the bond holder could at some point (in case of failure of the bond issuer) could become an owner of shares in a restructured company. A potential Nestle buyer would decide whether an investment in Nestle paper could be better done by buying shares (with immediate ownership benefits) or buying bonds (with potential benefits). The two choices have very different daily-available maneuvering options.<br /><br />I do not see government bonds of any issue in the same way as private debt. There would never be the possibility of a private investor of holding a share of ownership in government. It seems to me (using a private sector perspective) that government bonds are only useful as a vehicle of money storage for long periods of time. I would only use them if I wanted to save (as if I believed the advertisements on TV that urge individual savings). despite the perils of inflation and potential loss of capital. <br />Roger Sparkshttps://www.blogger.com/profile/01734503500078064208noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-81684022686161618512015-03-08T12:21:49.436-04:002015-03-08T12:21:49.436-04:00When Treasury borrows directly from the Central Ba...When Treasury borrows directly from the Central Bank, will the bond carry a negative interest rate? <br /><br />Or will negative interest rates only apply to sales of bonds to the private sector?Roger Sparkshttps://www.blogger.com/profile/01734503500078064208noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-3822541220329046762015-03-08T00:01:44.826-05:002015-03-08T00:01:44.826-05:00There is still the question of how effective this ...There is still the question of how effective this would be. If owners see negative rates as previews of coming economic attractions, they may conclude negative rates will be better than any alternative.Lordhttps://www.blogger.com/profile/06747994571555237739noreply@blogger.com