.

  • Written by John Hawkins, Assistant professor, University of Canberra
In DC Comics' world of opposites, a bizarro bond is "guaranteed to lose money". Today a bizarro bond is not just a fantasy. www.shutterstock.com

In 1960 DC Comics introduced the “Bizarro” planet of “Htrae”. Created with a duplicating ray, the planet’s inhabitants are all imperfect versions of Superman and Lois Lane, doing “opposite of all Earthly things”.

Adventure Comics

They go to bed when the alarm clock rings. They eat only the peel of a banana. They earn degrees by failing subjects. And they invest in “bizarro bonds” that are “guaranteed to lose money”.

Today a bizarro bond is no longer comic-book fantasy.

Now the governments of Austria, Denmark, Finland, France, Germany, Japan, Netherlands, Sweden and Switzerland are selling ten-year bonds with negative interest yields.

RBA/Refinitiv

The normal attraction of a bond is that, for an upfront payment, the issuer pays you back more – paying interest on the principal over a given number of years, and the principal at the end.

Government bonds – which are the main way governments fund deficits – have been particularly attractive to investors wanting minimum risk, because a government can generally be relied on to pay its debts.

But bonds with a negative interest rate mean bond holders are effectively paying governments to hold their money for them.

The existence of these bizarro bonds, and the fact anyone wants to buy them, tells us much about how strange global economics now are, and that expectations are low about things changing any time soon.


Read more: Explainer: why the Japanese economy is stuck in a holding pattern


Negative positives

Why would anyone want to buy such a bond? The main reason is still the same. A government bond is safe. It’s just that now the bond doesn’t guarantee a minimum return but a minimum loss.

Take, for example, the Swiss government bond that currently costs SFr103.15, pays no interest and will return just SFr100 when it “matures” in June 2029. The holder knows they’ll lose more than 0.3% over a decade, but no more. A term deposit in a Swiss bank is no better, with interest rates of about -0.3%, and less safe. Buying shares or gold might return more, but carry a bigger risk of losing a lot more.


Read more: Negative interest rates – are there any positives?


For foreign purchasers there is an additional consideration – they may be hoping the Swiss franc will strengthen against their local currency – but for Swiss citizens it largely comes down to paying the government to keep their money safe.

Short-term rates

Bond yields reflect a number of factors, but the most crucial one is expectations about short-term interest rates as well as inflation.

RBA

Right now interest rates around the world are at historically low levels, and there is is little expectation they will increase any time soon.

This is important because an investor can weigh the value of buying a ten-year bond against any other investment, particularly against buying a one-year government bond and then, when it matures next year, buying another one-year bond, and so on.

Suppose interest rates are about 1% but everyone buying bonds expects rates to rise. The ten-year bond would then need to offer a yield more than 1% to be competitive with simply buying one-year bonds and rolling them over (on the basis the yield offered will more than 1% next year). The ten-year yield would need to match the average expected returns from one-year bonds over a decade.

The market for negative yields on ten-year government bonds in Japan and Europe therefore implies that most investors are expecting near-zero or negative interest rates will be maintained by central banks for some years to come.

The yields on government bonds still in positive territory imply something similar. In Australia, for example, where the ten-year yield hit a historic low below 1.3% in June, the implication is that markets expect the Reserve Bank Australia to keep the cash rate at or below its current all-time low of 1% for a considerable period.

All this suggests markets are not optimistic about global economic growth (possibly due to concerns about higher US tariffs). It is the same with other long-term interest rates, such as term deposits offered by banks.

Implications

Negative interest rates are extremely rare. Even rates as low as 1% are historically unusual. In his epic study of interest rates, A History of Interest Rates (1963), author Sidney Homer suggests rates lower than 3% were virtually unknown in ancient Mespotamia, Greece or Rome, or in medieval and renaissance Europe.

Bank of England data show there were just three months between 1935 and 2012 when the yield on ten-year UK government bonds dropped below 2%. Since mid-2015, they have not been above 2%, and are now below 1%.

For governments, this could be a rare opportunity. It’s an ideal time to borrow. This should make infrastructure projects more economically viable.

In Australia, the Reserve Bank governor Philip Lowe has argued quite forcefully for more spending on infrastructure. “This spending not only adds to demand in the economy, but it also adds to the economy’s productive capacity,” he said in June.

But “debt and deficit disaster” and “back in the black” rhetoric may mean the Australian government does not seize this opportunity.

A government doing the opposite of the good advice given to it by a trusted central bank governor would be just what one expects in a Bizarro world.

John Hawkins does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

Authors: John Hawkins, Assistant professor, University of Canberra

Read more http://theconversation.com/guaranteed-to-lose-money-welcome-to-the-bizarro-world-of-negative-interest-rates-119994

'An insult' – politicians sing the praises of the cashless welfare card, but those forced to use it disagree

The grey cashless debit card cannot be used at any alcohol or gambling outlet, nor used to withdraw cash. www.shutterstock.com“This is a bit controversial, we know that,” deputy prime mini...

Eve Vincent, Senior Lecturer, Macquarie University - avatar Eve Vincent, Senior Lecturer, Macquarie University

As pressure on Iran mounts, there is little room for quiet diplomacy to free detained Australians

Former Foreign Minister Julie Bishop has offered to help free three detained Australians in Iran, but the attacks on Saudi oil facilities have made the situation vastly more complicated. Stringer/EPAA...

Tony Walker, Adjunct Professor, School of Communications, La Trobe University - avatar Tony Walker, Adjunct Professor, School of Communications, La Trobe University

The gloves are off: 'predatory' climate deniers are a threat to our children

A child jumps from a rock outcrop into a lagoon in the low-lying Pacific island of Tuvalu. AAP/Mick TsikasIn this age of rapidly melting glaciers, terrifying megafires and ever more puissant hurricane...

Tim Flannery, Professorial fellow, Melbourne Sustainable Society Institute, University of Melbourne - avatar Tim Flannery, Professorial fellow, Melbourne Sustainable Society Institute, University of Melbourne

Civilization: The Way We Live Now – powerful, troubling photographs of a crowded planet and uncertain future

Cyril Porchet, Swiss born 1984, Untitled 2014 from the series Crowd, inkjet print 139.0 x 169.0 x 3.5 cm. © Cyril PorchetIn 1955, an enormous photographic exhibition, The Family of Man, challenge...

Sasha Grishin, Adjunct Professor of Art History, Australian National University - avatar Sasha Grishin, Adjunct Professor of Art History, Australian National University

Keeping the city cool isn't just about tree cover – it calls for a commons-based climate response

Where’s the shade? Trees are not an immediate or whole answer to keeping cool. Cameron Tonkinwise, Author providedThis story is part of Covering Climate Now, a global collaboration of more than ...

Abby Mellick Lopes, Senior Lecturer in Design, Western Sydney University - avatar Abby Mellick Lopes, Senior Lecturer in Design, Western Sydney University

Why it's time for New Zealanders to learn more about their own country's history

New Zealand is one of few places in the world where teaching the country's own history has not been compulsory. from www.shutterstock.com, CC BY-NDFrom 2022, New Zealand history will be taught at all ...

Michael Belgrave, Professor History, Massey University - avatar Michael Belgrave, Professor History, Massey University

Curious Kids: why are some twins identical and some not?

Identical twins look the same, are the same sex, share the same birthday and shares the same genes. www.shuttershock.com , CC BYIf you have a question you’d like an expert to answer, send it to...

Alison McEwen, Head of Discipline of Genetic Counselling, Graduate School of Health, University of Technology Sydney - avatar Alison McEwen, Head of Discipline of Genetic Counselling, Graduate School of Health, University of Technology Sydney

Suddenly, the world's biggest trade agreement won't allow corporations to sue governments

The 16 nations negotiating the Regional Comprehensive Economic Partnership account for almost half the world's population. Shutterstock/DatawrapperThe Regional Comprehensive Economic Partnership has b...

Pat Ranald, Research fellow, University of Sydney - avatar Pat Ranald, Research fellow, University of Sydney

Greens' challenge aptly described by Paddy Manning, but with no solutions in sight

Paddy Manning’s excellent account of the Australian Greens will not be the last word on Australia’s most successful third party, but will doubtless remain important and influential for man...

Marc Hudson, Researcher, University of Manchester - avatar Marc Hudson, Researcher, University of Manchester

Explainer: what happens when magnetic north and true north align?

Very rarely, depending on where you are in the world, your compass can actually point to true north. https://www.shutterstock.comAt some point in recent weeks, a once-in-a-lifetime event happened f...

Paul Wilkes, Senior Research Geophysicist, CSIRO - avatar Paul Wilkes, Senior Research Geophysicist, CSIRO

Politics with Michelle Grattan: Jim Chalmers on the need to change economic course

Shadow Treasurer Jim Chalmers says it’s time to change Australia’s economic course “in a responsible and affordable way which doesn’t jeopardise the surplus”. Chalmers p...

Michelle Grattan, Professorial Fellow, University of Canberra - avatar Michelle Grattan, Professorial Fellow, University of Canberra

Reality slippages and narcissistic stereotyping - watching Content, a TV show made for smart phones

Lucy spends much of her life living through her phone screen – what happens when we are let into this vantage point? Mia Forrest/ABCLucy (Charlotte Nicado) is a pink-haired millennial having a q...

Emma Maguire, Lecturer in English and Creative Writing, James Cook University - avatar Emma Maguire, Lecturer in English and Creative Writing, James Cook University

You can help track 4 billion bogong moths with your smartphone – and save pygmy possums from extinction

Healesville Sanctuary, Werribee Open Range ZooEach year, from September to mid-October, the tiny and very precious mountain pygmy-possums arise from their months of hibernation under the snow and beg...

Sally Sherwen, Director Wildlife Conservation and Science, Zoos Victoria, University of Melbourne - avatar Sally Sherwen, Director Wildlife Conservation and Science, Zoos Victoria, University of Melbourne

Is vigorous exercise safe during the third trimester of pregnancy?

Vigorous exercise is safe while pregnant, even in the final trimester. But if you don't feel up to it, lighter exercise is beneficial too. From shutterstock.comExpectant mothers receive an avalanche o...

Kassia Beetham, Exercise Physiology Lecturer, Australian Catholic University - avatar Kassia Beetham, Exercise Physiology Lecturer, Australian Catholic University

Climate change is the defining issue of our time – we're giving it the attention it deserves

The Conversation has joined more than 250 news outlets around the world to focus on climate change coverage. We provide 100% evidence-based coverage on climate change. Stay informed BY subscribing to...

Nicole Hasham, Section Editor: Energy + Environment - avatar Nicole Hasham, Section Editor: Energy + Environment

Australia to attend climate summit empty-handed despite UN pleas to ‘come with a plan'

The Port Kembla industrial area in NSW. Industry emissions can be cut by improving efficiency, shifting to electricity and closing old plants. Dean Lewins/AAPThis story is part of Covering Climate Now...

Frank Jotzo, Director, Centre for Climate and Energy Policy, Crawford School of Public Policy, Australian National University - avatar Frank Jotzo, Director, Centre for Climate and Energy Policy, Crawford School of Public Policy, Australian National University

'Climigration': when communities must move because of climate change

Flood damage in Bundaberg, Queensland, in 2013. Most communities are at some risk from extreme events, but repeated disasters raise the question of relocation. srv007/Flickr, CC BY-NCThis story is par...

Tony Matthews, Senior Lecturer in Urban and Environmental Planning, Griffith University - avatar Tony Matthews, Senior Lecturer in Urban and Environmental Planning, Griffith University

As Scott Morrison heads to Washington, the US-Australia alliance is unlikely to change

Wes Mountain/The Conversation, CC BY-NDPrime Minister Scott Morrison’s official visit to Washington this week carries some prestige. It is just the second “official visit” (includin...

David Smith, Senior Lecturer in American Politics and Foreign Policy, Academic Director of the US Studies Centre, University of Sydney - avatar David Smith, Senior Lecturer in American Politics and Foreign Policy, Academic Director of the US Studies Centre, University of Sydney

Apple's iPhone 11 Pro wants to take your laptop's job (and price tag)

What a week it has been in the Apple core. In recent days the tech giant has released a litany of products, including new phones, watches, tablets, and more. The big-ticket items are clearly the new ...

Andrew Maxwell, Senior Lecturer, University of Southern Queensland - avatar Andrew Maxwell, Senior Lecturer, University of Southern Queensland

Sick and Tired of Your Dead End Job? Try Teaching!

Tired of the same old grind at the office? Want an opportunity to impact lives both in your community and around the world? Do you love to travel and have new experiences? Teaching English is the perfect job for you! All you need is a willingness to ...

News Company - avatar News Company

The Impact of an Aging Population in Australia

There’s an issue on the horizon that Australia needs to prepare for. The portion of elderly citizens that make up the country’s overall population is increasing, and we might not have the infrastructure in place to support this. Australians h...

News Company - avatar News Company

LifeStyle

Picking The Right Crystal Yoni Egg: Tips And Instructions

When you are ready to pick your own crystal yoni egg, you need to decide what you will use it for...

Top 5 Tips for Paddleboarding In Whitewater

Paddleboarding can be relaxing as well as intense. If you occasionally want to do something differen...

3 Most Promising Career Occupations for Graduates in 2019

Studying in college is a great adventure which opens up lots of career opportunities. Yet, at times...

SCARmed Silicone Gel

AUSTRALIA LEADS WAY WITH ALL-NEW RAPID-DRYING SILICONE GEL WORKING WONDERS IN SCAR REDUCTION   ...