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Return of capital has become more important than return on captial in many countries today.
If you are the bank of Greece you need a country and currency to store a few billion bucks in that won't depreciate as fast as it will if you hold it in your own.
Germany at a slightly negative rate is a better deal for them as an example
Return of capital has become more important than return on captial in many countries today.
If you are the bank of Greece you need a country and currency to store a few billion bucks in that won't depreciate as fast as it will if you hold it in your own.
Germany at a slightly negative rate is a better deal for them as an example
I missed the on/of I thought it read on in both instances
Where does a country like greece take 10 billion dollars that they do not want to keep in their own depreciating currency and buy a cd ?
answer ---no where , they need to buy bonds with that much money.
now figure in the fact they do not want to loose their shirt buying bonds in a super strong currency like ours.
Answer- you give up a little bit and buy bonds from some these negative rate countries that are healthy enough that your money is safe yet not so strong that you lose 30% to currency devaluation.
So you're paying to have a bond? Why would anyone do that?
There are a couple possible motivations for this...
1. Preservation of capital- everyone knows Germany won't default so owning their bonds is a pretty safe bet you'll get your money back. If you've got a lot of money you don't really want to hold it in cash and it isn't 100% safe in European banks.
2. Possible capital gains- if the interest rate becomes more negative you can sell your bonds for a capital gain. This is likely the motivation of many/most of the people buying negative yielding bonds.
3. Positive real yield?- it is debatable what the real yield will be when you factor in inflation/deflation. If there is some deflation then the negative nominal yield turns into a positive real yield.
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