So sitting around thinking about this. The traditional deflation hedge is cash but if interest rates go negative what’s a guy to do? I don’t want to keep a 1000 pounds of Franklins in my basement for a myriad of reasons. Safety deposit box has drawbacks including the rental fee for a big enough box would probably cost more than negative rates.
Gov’t bonds, certain stocks, shorting mortgage-backed securities?
Property… Ha ha ha ha
Pay off your mortgage?
Have you looked and gvt bond yields recently
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Gov’t bonds, certain stocks, shorting mortgage-backed securities?
Meh guvvies I don’t think will react well to deflation. Stocks are out. And not shorting MBS.
Next
Property… Ha ha ha ha
Pay off your mortgage?
I’d like to keep liquidity though
Gov’t bonds, certain stocks, shorting mortgage-backed securities?
Meh guvvies I don’t think will react well to deflation. Stocks are out. And not shorting MBS.
Next
Actually, they will.
Treasury yields decrease in deflationary environments (check out what happened in 2007-08)
Yields are inverse to price, so bonds will do better than cash in a deflationary environment.
Gold isn’t bad. It is over 20K a pound and you can store alot in a drawer sized deposit box. Silver forget it even at 20 dollars an oz it isn’t concentrated enough. But you will likely pay a 3-5 percent premium to buy it and lose a few percent selling it to a dealer. It isn’t that liquid lot like selling a stock for sure. The safe deposit box cost isn’t the problem.
Gov’t bonds, certain stocks, shorting mortgage-backed securities?
Meh guvvies I don’t think will react well to deflation. Stocks are out. And not shorting MBS.
Next
Actually, they will.
Treasury yields decrease in deflationary environments (check out what happened in 2007-08)
Yields are inverse to price, so bonds will do better than cash in a deflationary environment.
Yeah but if we’re at this point the Treasury will be issuing a shit ton of debt to stiumulate growth
Buy some gold.
So sitting around thinking about this. The traditional deflation hedge is cash but if interest rates go negative what’s a guy to do? I don’t want to keep a 1000 pounds of Franklins in my basement for a myriad of reasons. Safety deposit box has drawbacks including the rental fee for a big enough box would probably cost more than negative rates.
Bitcoin.
Yeah but if we’re at this point the Treasury will be issuing a shit ton of debt to stiumulate growth
That’s not how any of this works. In a deflationary environment the fed lowers interest rates and actually buys gov’t debt, sticks it on their balance sheet and issues cash, which has the effect of increasing treasury values (decreasing yields) even further. The Treasury issuing debt has almost zero short-term effect on yields.
To the other posters - gold and bitcoin are inflationary hedges not deflationary hedges.
Yeah but if we’re at this point the Treasury will be issuing a shit ton of debt to stiumulate growth
That’s not how any of this works. In a deflationary environment the fed lowers interest rates and actually buys gov’t debt, sticks it on their balance sheet and issues cash, which has the effect of increasing treasury values (decreasing yields) even further. The Treasury issuing debt has almost zero short-term effect on yields.
To the other posters - gold and bitcoin are inflationary hedges not deflationary hedges.
I’m talking negative interest rate environment and massive deflation.
Let’s put it this way if the economy is so shitty that savings accounts and CDs are negative I don’t want to own US government paper because at some point the Fed’s balance sheet wouldn’t be able to take it (unlimited can print money blah blah I know).
I’m talking negative interest rate environment and massive deflation.
Let’s put it this way if the economy is so shitty that savings accounts and CDs are negative I don’t want to own US government paper because at some point the Fed’s balance sheet wouldn’t be able to take it (unlimited can print money blah blah I know).
Your original question was what can you do right now to protect against negative interest rates and deflation, corrrect?
If you buy a 30 year gov’t bond today at fixed rate of 2%, say, and interest rates plummet to the negative, what happens to your bond? It INCREASES in value. That is the inverse relationship of price/yield. It doesn’t matter if the Fed’s balance sheet can “take it” - there are plenty of other people around to buy that government paper and will do so in a flight to safety.
https://www.investopedia.com/terms/b/bond-yield.asp
As bond prices increase, bond yields fall. For example, assume an investor purchases a bond that matures in five years with a 10% annual coupon rate and a face value of $1,000. Each year, the bond pays 10%, or $100, in interest. Its coupon rate is the interest divided by its par value.
If interest rates were to fall in value, the bond’s price would rise because its coupon payment is more attractive. For example, if interest rates fell to 7.5% for similar investments, the bond seller could sell the bond for $1,101.15. The further rates fall, the higher the bond’s price will rise, and the same is true in reverse when interest rates rise.
I’m talking negative interest rate environment and massive deflation.
Let’s put it this way if the economy is so shitty that savings accounts and CDs are negative I don’t want to own US government paper because at some point the Fed’s balance sheet wouldn’t be able to take it (unlimited can print money blah blah I know).
Your original question was what can you do right now to protect against negative interest rates and deflation, corrrect?
If you buy a 30 year gov’t bond today at fixed rate of 2%, say, and interest rates plummet to the negative, what happens to your bond? It INCREASES in value. That is the inverse relationship of price/yield. It doesn’t matter if the Fed’s balance sheet can “take it” - there are plenty of other people around to buy that government paper and will do so in a flight to safety.
https://www.investopedia.com/terms/b/bond-yield.asp
As bond prices increase, bond yields fall. For example, assume an investor purchases a bond that matures in five years with a 10% annual coupon rate and a face value of $1,000. Each year, the bond pays 10%, or $100, in interest. Its coupon rate is the interest divided by its par value.
If interest rates were to fall in value, the bond’s price would rise because its coupon payment is more attractive. For example, if interest rates fell to 7.5% for similar investments, the bond seller could sell the bond for $1,101.15. The further rates fall, the higher the bond’s price will rise, and the same is true in reverse when interest rates rise.
I did not say right now.
Good thing I’ve never traded interest rates before.
Municipal tax sale auction offers prime plus 3 here.
Maurice
Why does price increase if yield decreases
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Why does price increase if yield decreases
A bond with a fixed interest payment (say 5%) becomes more valuable when market rates go down (from say 5% to 4%). So a fixed interest rate bond’s value goes up in value/price, when market yields decrease.
Why does price increase if yield decreases
Magic
or what Kay said
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Property… Ha ha ha ha
Pay off your mortgage?
FWIW, someone thinks U.S. RE is a hedge. One of the reasons I haven’t been able to reply to a lot of posts on here recently is I’ve been working 6:00am-9:00pm non-stop for the last two weeks on a possible sale of ~250,000sf of our retail RE here in FL. We received an unsolicited offer from a European buyer and, frankly, the price is pretty decent. They offered 16.5x NOI on a portfolio that I think the market is 15x NOI. Again, unsolicited offer so they’re not starting out high (I mean in theory they might be starting high but that’s a weird meta for properties that haven’t been for sale in ~20 years and are owned cash free and clear).