No doubt, by now, you’ve seen the news that some Swiss banks intend to offer their depositors a negative interest-rate on their accounts. Well, you don’t have to go overseas to get a negative, nominal rate. Right here in the good, old USofA, you can find bonds that --currently -- are offering a negative, nominal return. Here are some examples: Merck’s variables of ’40, whose monthly reset is 1m LIBOR minus 45bp, and UPS’s variables of ’50, whose monthly reset is the same. Given that the current, 1m LIBOR rate is 0.21bp, subtracting 45bp from that puts the bond holder under water. Plus, to buy either of those bonds, you’d have to pay a commission that would wipe out the slight discount to par the bonds are currently being offered at. Thus, on a cap-gains basis, you’d be giving them roughly even money to hold your money, but you’d be losing money on an ordinary-income basis, never mind the fact that neither is a top-tier, triple-AAA credit. So you’d be taking on a bit of default-risk as well. Of course, after taxes and inflation, almost all bonds are currently offering a negative, real rate of return, which is a separate problem. But why is money/credit so cheap? Because the whole rest of the world is responding to the US printing money (aka, “quantitative easing” and other such monetary tricks) by cranking up their printing presses as well. In short, all of them are trying to fix a solvency problem with a liquidity solution whose net-effect is to transfer wealth from savers to borrowers. When it isn’t hard to find examples of pricings that are so disadvantageous to the buyer --though, of course, not to the seller --the asset-class is clearly in a bubble. Be careful. This isn’t going to end well for anyone. Charlie
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