Jumat, 10 April 2015

Borrow at negative interest rates ? What has the world come to



Sometimes the world of finance is utterly incomprehensible to , well, even finance guys. Take for instance what has been happening in Europe.

A few governments in Europe have been issuing short term bonds carrying negative interest rates. That means you pay for the privilege of lending to the government ! Even Spain (the country tottering on a default a couple of years ago) has done this. But these worthies, which include Germany, Austria and Finland as well,  issued only short term debt like this. 

Switzerland has this week taken it to a different level.  It has issued 10 years bonds at negative interest rates. TEN YEAR BONDS. The first country in the world to do so.  And it was handsomely oversubscribed.

So what is happening ? Why would any idiot pay to lend money.  Doesn't it turn everything we know about finance upside down ?

We are in completely uncharted territory and nobody knows what the implications are. Borrowing binges are likely. Will banks now start to charge you for depositing money into your account ?

Part of the  "logic"  of the people buying these negative interest bonds is as follows

  • When interest rates fall, bond prices go up (Its too technical to explain in layman terms, but take this for a fact)
  • They are expecting interest rates in Europe to fall further
  • When that happens the prices of these bonds will rise. They will sell and make a profit !

Of course, in the long run some idiot will be left holding a pile of worthless shit. But finance is all about the short term (alas, becoming extremely short term). Who cares for the sucker in the long run.

Very clever. If only all the fantastic brains who are thinking up incomprehensible ideas in finance were to turn their minds to solving some of the world's more real problems ...........

By the way, if you are in IT, here's a golden opportunity, not unlike Y2K. Bank's IT systems are not tailored to deal with a minus sign in the interest column.  Have to rewrite millions of lines of code ........
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