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Borrow money and be paid to do so!

Monday, July 9, 2012

No, there is no typo in the title of this blog post. Yes, you read it correctly!

So, where can we go to borrow some money and be paid to do so? Who are the people lending us money and paying us for it? Maxi-Cash?

Nope, not Maxi-Cash. What I am describing is happening in Germany and, unfortunately, the option is not open to us. So, it would remain a dream.

Hey, day dreaming is actually good for health, you know?



BERLIN: Investors paid to lend Germany money for six months at an auction on Monday, the country's central bank said, as they flocked to the safe haven of Europe's top economy.

The yield or rate on the auction of six-month debt was a record low -0.03 percent, the Bundesbank, which organised the auction, said in a statement.


Source: CNA, 9 July 2012.
Read the full story: here.

In ASSI, we talk of growing our wealth and beating inflation. We also say that if we want to protect our wealth, we have to take risk. So, to find investors parking billions of Euros in bonds with a negative yield is simply mind boggling! For these investors, they cannot even talk about how the interest they receive is not keeping up with inflation. Upon maturity, they would get back a smaller amount! (Keeping my money at home would at least ensure that the nominal value stays the same, wouldn't it? I think I am missing something here.)

Some would argue that these investors are paying the borrower to keep their money safe. Now, I am going to say something which you might find enlightening (or not): Keeping our money safe is not the same as keeping our wealth safe.

Related posts:
1. Grow your wealth and beat inflation.

2. To protect our wealth, we have to take risk.

25 comments:

FoodieFC said...

I have heard of this scenario before. But in reality this does not make sense (to me)..

Why would I want to pay money and park the money at another place? If thats the case, I rather keep it under my bed!

AK71 said...

Hi FoodieFC,

Under your bed sounds better than in your bed. ;p

I still remember a report on an Israeli woman who lost her life savings because she stashed her money in her very old mattress. No one knew. Her daughter decided to buy her a new mattress one day as a surprise and threw out her old one!

What would really upset me is to wake up one day to find that Singapore banks no longer pay interest on our deposits but instead require us to pay them for safekeeping! What do we get on our savings now in POSB? 0.125% per annum?

Anyway, I learn from my late maternal grandmother and keep a stash of cash at home in a tin! Why a tin? Termites won't get to your money that way. Haha.. Oh, but with plastic money these days, there is less risk of termites having a gourmet meal at our expense. ;p

FoodieFC said...

Hi AK71

What a (shocking) surprise it must have been for the woman!

I have been thinking. Is it because the pple do not want to hold on to Euro as they do not know how much more it will fall?

Hence, they rather pay a little to hold on germany bonds (which is unlikely to depreciate too fast).

Jay said...

AK71,

Keeping a few thousand $ under the matress is something different from a pension fund selling his stocks or getting new money and needing to invest 100M$ somewhere; or a hedge fund betting that the Eurozone will break up and a new Deutschmark appreciate.. ;-)

Negative interest rates exist in many 'safe haven' curreny environments. Swiss banks have historically often paid negative interest rate as investors were either playing on the safe curreny (or more likely evading taxes.. ;-)

With Singapore wanting to become the Swiss of Asia, we might see negative deposit interest rates here as well some day.. ;-)

But clearly something is wrong in the picture you described (unless you indeed do believe in a Euro break-up) and it sounds like a sitation that will be reversed. For long-term investors like us, a shorting opportunity coming up?? ;-)

coconut said...

i just heard last night that the italian gov't is borrowing money @ 7% and lend it to spain @ 3%.

why i don't have this kind of friend haha.

its a sign that the economy is turning upside down, back to the very old days, better start collecting some tins.

Ray said...

we are forgetting the fact that the bonds can appreciate in price.

Ray said...

so a bond cannot be compared to a bank deposit :) coz deposits dont appreciate in price.

AK71 said...

Hi FoodieFC,

Well, Germany is using the Euro too. So, there really isn't any difference that way. Investors who fear that their Euro deposits are going down in value, they could think of shifting some of their money into Singapore or Switzerland, for examples.

AK71 said...

Hi Jay,

Now that you say it, yes, Switzerland too! My, my. Singapore is next?!

All the hedge funds and their shennanigans are way beyond me. I cannot understand their elaborate plans. :(

It has been a long time since I shorted anything... Years, in fact. I try to leave the shorting to others.

What is happening to the world? I remember my professor in NUS would say that economists have made a mess of the world. I think he missed out bankers and politicians. ;p

AK71 said...

Hi coconut,

A friend in need is a friend indeed. Hahaha.. Yes, how come I don't have friends like that?

The day I have to pay the banks to deposit my money with them is the day I keep most of my money at home. Still have to keep some in the banks, unfortunately.

Thank goodness I have been collecting Bengawan Solo mooncake tins and Red Lion biscuit tins! You need? I sell one to you. ;p

AK71 said...

Hi Ray,

These bonds can appreciate in price meh? I wonder who would want them. I am, of course, a frog in a well and can only see a small patch of the sky. :(

coconut said...

sure can do AK, its the most direct investment into interest rate.

banks deposit are for people like us, usually left with bones haha.

"kam sia", mooncake and biscult tins i don't want, wait accidentally gives away as gift. i collect rusty one, very safe.

AK71 said...

Hi coconut,

I realise that I am ignorant of so many things in the world. The older I grow, the more aware I am of my ignorance.

This is self-knowledge. Very humbling.

I am very giamsiap and would not be in danger of giving away mooncakes and biscuits as gifts. Haha.. Rusty tins are a hazard. Might get tetanus if we accidentally cut ourselves. I kiasi. ;)

Ling said...

I think this is public funds? cannot be private investors... who would be so silly?

AK71 said...

Hi Ling,

Well, the report says "investors".

Like Ray said, people could resell these bonds to other people who feel similarly insecure about leaving their money anywhere else. Of course, if they manage to sell these bonds at a gain, it would mean that the buyers would be losing even more money...

You are probably right to suggest that the money could mostly be from institional investors. Like Jay suggested, these institutions are more concerned with counterparty risks. They may lose out in returns but the lower counterparty risk makes it worthwhile. They probably have more money under management than they could stash in their matteresses. ;p

Ray said...

Bonds can appreciate if they are deem more and more valuable.
Why buy bonds that dont pay interest or AKA zero or negative yield?

I'm not sure if it's 100% correct but this is what I found:

"the purchase of a German government bond, even with a negative yield, is an insurance against the break-up of the euro. A German government bond, which is later converted into “new Deutschmarks”, would, as a result of the currency effect, virtually increase in value overnight by 40-50% compared to currencies in the peripheral countries. An investor who considers the break-up of the eurozone a possibility can therefore use the purchase of Federal government bonds to hedge against this risk."

AK71 said...

Hi Ray,

Indeed, the negative interest rate is probably the premium one pays for insurance against the break up of the eurozone. This is one possible explanation.

However, to make money from this particular bond issue, one would have to be very pessimistic as one would have to expect the eurozone to break up within the next 6 months.

Singapore Man Of Leisure said...

When you don't trust the banks, you "pay" to put money in a place where you "believe" it's safe.

With Spanish banks needing to be bailed out, would you put your savings in Italian, French, Portuguese, Cyprus, and Greek banks?

German banks? Do they have counter-party exposure to other European banks above?

Bond traders and investors are mainly institutional and high net-worth individuals.

They are higher on the investment food chain ;)

AK71 said...

Hi SMOL,

Counter party risks indeed!

I am a bottom feeder, definitely not high up in the food chain. I should increase the stash of cash I have in my Bengawan Solo mooncake tin at home...

Unknown said...

Hi
Those guy who keep their money there ( german bonds) are not simple people. They are sophisticated invester. Do you all think they are stupid to pay someone to keep their money safe.

If you are a Greek or Spanish. Do you dare to put your money in their country's bank, or in their own house vault. What if there is chaos, riot, looting occur. And bank can go bankrupt, what if their country defaulted, their wealth are going to suffer.

Look at it this way, they are putting their money in a safety deposit box, you know the one you pay them an annual fee to use.

For me, if I am a wealthy Greek or spaninsh, I will make my move now and shift my money to German bund, the safest. I don't mind to lose a few % then lose all in my own country.

Thus, it appear that they are stupid, but they are smart, they are not stupid.

victor

AK71 said...

Hi Victor,

I hear you. Smart and sophisticated indeed. :)

I am wondering if these people could be smarter and more sophisticated if they were to move a big portion of their money out of the eurozone altogether?

Preference shares and bonds offered by Singapore banks could yield 3 to 4% per annum, for example. Or what about Singapore government bonds? We are a AAA rated country.

Of course, these smart and sophisticated eurozone investors could have so much money that they would still park quite a bit in a negative yielding German bond due to nearness, perhaps. :)

Unknown said...

AK

I try to get the article regarding why invester pay to keep their money safe from CNBC,so I can paste here for you all, but it was gone, I could not find it anymore.

Anyway, the article said that it was for currency appreciation. They are betting that the currency in a sound country will rise overtime giving then a profit.

Let say, all want to put their money there, they will have to buy that country currency first, thus this strenghten that country currency and with more join in to put their money there later, this will cause that currency to strengthen further. So that is the real reason. Thus, that -0.03% is nothing if that safe have country currency will rise to the tune of a few % or more, if the PIGS situation got worsen. And they know they(PIGS) will only get worse, what else?

So that is why? currency speculation again. So we think they are crazy to pay people for nothing.

That was what I think initially also.

victor.

AK71 said...

Hi Victor,

I think it is more than that.

After all, Italy, Greece, Spain and Portugal all use the same currency as Germany. Currency appreciation? How is that going to happen?

People could be betting on the collapse of the eurozone and that each member country would go back to using their old currencies. So, lending to Germany would be a good bet.

Last night, I read that, once again, investors bought the country's bonds, this time for 2 years, with a negative yield!

Is the eurozone going down the jamban? Time will tell.

Unknown said...

AK

If they break up, every country will go back to their original currency, so here is the pro. If that happen, their wealth if kept in their own country will be down more than half.Those who bought German bund are buying on this perception., i.e. euro breakup. That was from the article i read. Thus currency appreciation.

victor

AK71 said...

Hi Victor,

Well, strictly, that isn't currency appreciation. If that is how the article coined it, it would confuse readers.

However, I know what you are saying, having said the same thing myself in my preceding comment. :)

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