30 Year Bond

[Rabbitisrich]

Biaggio,

 

What, you re going to pay someone to hold your cash?

 

Imagine you have $100m that you want to save.

 

What are your alternatives?  You don't have FDIC protection (and there is no reasons why bank accounts can't have negative rates), and you can't put that in a safe under your bed.

 

Sure, regular Joe's with $5,000 don't have to accept negative rates, but they aren't the majority of deposits.

 

Not arguing that we will see those rates, but I'm just saying that there is some reason for why T-Bill yields sometimes go negative.  It could happen for longer dated issues too.

 

Ben

 

To protect $100m you only need to purchase 400 certificates of deposit -- each one from a different bank.

 

The $250,000 in FDIC protection is only the limit of protection that you have from each individual bank.

 

FDIC coverage is unlimited for non-interest until the end of the year.

[biaggio]

Biaggio,

 

What, you re going to pay someone to hold your cash?

 

Imagine you have $100m that you want to save.

 

What are your alternatives?  You don't have FDIC protection (and there is no reasons why bank accounts can't have negative rates), and you can't put that in a safe under your bed.

 

Sure, regular Joe's with $5,000 don't have to accept negative rates, but they aren't the majority of deposits.

 

Not arguing that we will see those rates, but I'm just saying that there is some reason for why T-Bill yields sometimes go negative.  It could happen for longer dated issues too.

 

Ben

 

To protect $100m you only need to purchase 400 certificates of deposit -- each one from a different bank.

 

The $250,000 in FDIC protection is only the limit of protection that you have from each individual bank.

 

Thanks for your response- I should have known you guys would have a logical explanation.

 

Quite a statement from the market as to the fear that is out there.

 

What are CDARS?

[benhacker]

Eric,

 

To protect $100m you only need to purchase 400 certificates of deposit -- each one from a different bank.

 

The $250,000 in FDIC protection is only the limit of protection that you have from each individual bank.

 

and there is a service that does this regulatory arbitrage for you (forget the name)... it's run by ex-Fed guys.  But it does cost money (% of AUM fee).

 

Certainly you can do it yourself, but quite the paperwork hassle.

 

Ben

[Junto]

Biaggio,

 

What, you re going to pay someone to hold your cash?

 

Imagine you have $100m that you want to save.

 

What are your alternatives?  You don't have FDIC protection (and there is no reasons why bank accounts can't have negative rates), and you can't put that in a safe under your bed.

 

Sure, regular Joe's with $5,000 don't have to accept negative rates, but they aren't the majority of deposits.

 

Not arguing that we will see those rates, but I'm just saying that there is some reason for why T-Bill yields sometimes go negative.  It could happen for longer dated issues too.

 

Ben

 

To protect $100m you only need to purchase 400 certificates of deposit -- each one from a different bank.

 

The $250,000 in FDIC protection is only the limit of protection that you have from each individual bank.

 

Untrue...time to do a refresher on FDIC insurance limits and the flexibility of using beneficiaries on accounts...or even easier instead of buying a negative bond put it in a non-interest bearing account which is fully secured with no limit on FDIC insurance.

 

http://www.fdic.gov/deposit/deposits/index.html

 

[ERICOPOLY]

Biaggio,

 

What, you re going to pay someone to hold your cash?

 

Imagine you have $100m that you want to save.

 

What are your alternatives?  You don't have FDIC protection (and there is no reasons why bank accounts can't have negative rates), and you can't put that in a safe under your bed.

 

Sure, regular Joe's with $5,000 don't have to accept negative rates, but they aren't the majority of deposits.

 

Not arguing that we will see those rates, but I'm just saying that there is some reason for why T-Bill yields sometimes go negative.  It could happen for longer dated issues too.

 

Ben

 

To protect $100m you only need to purchase 400 certificates of deposit -- each one from a different bank.

 

The $250,000 in FDIC protection is only the limit of protection that you have from each individual bank.

 

Untrue...time to do a refresher on FDIC insurance limits and the flexibility of using beneficiaries on accounts...or even easier instead of buying a negative bond put it in a non-interest bearing account which is fully secured with no limit on FDIC insurance.

 

http://www.fdic.gov/deposit/deposits/index.html

 

Thanks for pointing that out.

[HJ]

Biaggio,

 

What, you re going to pay someone to hold your cash?

 

Imagine you have $100m that you want to save.

 

What are your alternatives?  You don't have FDIC protection (and there is no reasons why bank accounts can't have negative rates), and you can't put that in a safe under your bed.

 

Sure, regular Joe's with $5,000 don't have to accept negative rates, but they aren't the majority of deposits.

 

Not arguing that we will see those rates, but I'm just saying that there is some reason for why T-Bill yields sometimes go negative.  It could happen for longer dated issues too.

 

Ben

Forget about a guy with $100MM.  Imagine you were the treasurer of Apple or Microsoft, care taker of tens of billions, sprinkled among 15 banks across the world.  You modus operandi in the past was just stash them in a money market fund that the bank offered.  And that, through the "shadow banking operation" goes into the real economy.  Some of your brethens in smaller institutions put the money into auction rate preferreds.  Then the crisis happens, you find out that the oldest money market fund out there, Reserve Fund, broke the buck, and the auction rate preferreds were written down 20 points.  Think the furry of equity investors out there.  Over the year, the headline subsided, your life went back to semi normal, but would you do that again?  So you find a too big to fail bank just to stash as deposit, and now you find this headline:

 

http://www.cnbc.com/id/44019510/Bank_of_New_York_Puts_Charge_on_Cash_Deposits

 

Is that different from a negative rate?

 

 

[turar]

http://brooklyninvestor.blogspot.ca/2012/06/banks-real-nightmare.html

 

[link01]

The premise of the balance sheet recession and sustained low rates strikes me as fairly sound at the moment.  I would be disinclined to short any bonds for the reason that nothing may happen at all for years.

 

An alternative is to buy shares of companies who can issue long bonds at close to the 10 or 30 year rates, turn around and make buckets of money off it.  JPM did this last summer.  I recall MSFT and GE doing this as well.  I am sure there were others.  Of course JPM squandered the advantage.

 

Long leap pos: GE, JPm

 

ditto that.

 

and the recent experience of a very high profile, gun-slinging hedge funf mngr short japan bonds illlustrates the point in sharp relief:

 

kyle bass is the founder of Hayman Capital. He is famous now for buying Greek Sovereign Credit Default swaps at $1,000 for $1 million of the price. He Supposedly made a 650x return for each swap which he bought. He was also early in the subprime game and shorted that successfully, as well.

 

Bass is a known bear. He owns physical gold and even has a sheltered stocked up and ready for doomsday.

 

Bass has been in the media recently for his bearish views on Japan. We have disagreed strongly as noted here.

 

Bass compared Japan’s method of financing its debt to the massive ponzi scheme by Bernie Madoff in a recent interview stating:

 

“You can make promises for a long time as long as you don`t have to live up to them.”

 

“Japan is in the crosshairs of the market… I`ve never seen more mispriced optionality in my entire life.”

 

He has purchased Credit default swaps and shorted Japanese Government bonds, according to statements and people familiar with the matter.

 

So far the trade has been going in the opposite direction. According to our source, Bass’ Macro Opportunities Master Fund is down 32% in April alone.

 

January performance was -8%, February 7% and March 2%, and year to date -29%.

 

Since inception in July, 2010 the fund is down 61%.

 

We were unable to confirm assets under management or percentages of each security in the fund.

 

The Japan trade has not played out yet, but Bass made the above comments only several days ago. He clearly thinks that eventually he will be proven correct.

 

http://www.valuewalk.com/2012/05/kyle-bass-japan-macro-fund-down-29-for-april/

 

[vinod1]

http://brooklyninvestor.blogspot.ca/2012/06/banks-real-nightmare.html

 

Now look at the U.S. bank net interest margins.  Hmmmm....

 

There are factors that is better in the U.S. than in Japan.  Demographics, for example, is favorable in the U.S. while it is a negative in Japan.  I think (despite the financial crisis) that U.S. banks are generally much better managed in the U.S. than in Japan (look at how the subprime blowup occured in the U.S. and Japan avoided most of the U.S. problems, but MTU still lost a lot of money in 2008 and 2009 while JPM didn't even have a single quarterly loss).

 

Dimon has been asked about this on conference calls, and he feels that although he can't predict interest rates, he thinks it will eventually get back to more 'normal' levels.  I think Buffett said the same thing; he feels that the bond market is the biggest bubble of all time.

 

This sounds right to me, but I just can't get over the Japanese JGB bubble that has been ongoing for 20 years!  And if it continues here for longer than many think, what happens to the banks?  Don't even open up an income statement of a U.S. bank and try to plug in a 2.0% or 1.5 net interest margin to model potential earnings (or losses).  Your blood pressure will go up.

 

 

I think there are several differences

 

1. Net Interest Margin is less than 2% all through the 1980's, way before the ZIRP. Lots of reasons, and not related to deflation.

 

2. Low ROA of Japanese banks is due to several reasons. Among them, due to cross holdings Japanese banks are holding more than 150% of the common equity in stocks of other companies. All these equity investments are less than 5% each so they are exposed to stock market declines but these are not marked to market and they had to write them down over a period of several years. Their loan losses and NPL are also much much higher. A consequence of their total RE value being priced at 5x their GDP and banks using this overvalued RE as collateral. You can look at corporate governance, shareholding patterns, Govt response. Low ROA is not primarily due to low NIM. And none of this is even remotely close to what we have in US.

 

Vinod

 

 

[PlanMaestro]

2. Low ROA of Japanese banks is due to several reasons. Among them, due to cross holdings Japanese banks are holding more than 150% of the common equity in stocks of other companies. All these equity investments are less than 5% each so they are exposed to stock market declines but these are not marked to market and they had to write them down over a period of several years. Their loan losses and NPL are also much much higher. A consequence of their total RE value being priced at 5x their GDP and banks using this overvalued RE as collateral. You can look at corporate governance, shareholding patterns, Govt response. Low ROA is not primarily due to low NIM. And none of this is even remotely close to what we have in US.

 

Vinod, have you seen any report on this?

[vinod1]

2. Low ROA of Japanese banks is due to several reasons. Among them, due to cross holdings Japanese banks are holding more than 150% of the common equity in stocks of other companies. All these equity investments are less than 5% each so they are exposed to stock market declines but these are not marked to market and they had to write them down over a period of several years. Their loan losses and NPL are also much much higher. A consequence of their total RE value being priced at 5x their GDP and banks using this overvalued RE as collateral. You can look at corporate governance, shareholding patterns, Govt response. Low ROA is not primarily due to low NIM. And none of this is even remotely close to what we have in US.

 

Vinod, have you seen any report on this?

 

Nothing that directly addresses the question of causes behind low NIM. But a good paper that goes into the issues is by IMF www.imf.org/external/pubs/ft/wp/2000/wp0007.pdf

 

Vinod

 

 

[Rabbitisrich]

2. Low ROA of Japanese banks is due to several reasons. Among them, due to cross holdings Japanese banks are holding more than 150% of the common equity in stocks of other companies. All these equity investments are less than 5% each so they are exposed to stock market declines but these are not marked to market and they had to write them down over a period of several years. Their loan losses and NPL are also much much higher. A consequence of their total RE value being priced at 5x their GDP and banks using this overvalued RE as collateral. You can look at corporate governance, shareholding patterns, Govt response. Low ROA is not primarily due to low NIM. And none of this is even remotely close to what we have in US.

 

Vinod, have you seen any report on this?

 

Nothing that directly addresses the question of causes behind low NIM. But a good paper that goes into the issues is by IMF www.imf.org/external/pubs/ft/wp/2000/wp0007.pdf

 

Vinod

 

The first attachment looks at the stability of Japanese bank NIMs despite the zero boundary and rising credit costs. The second attachment covers a later period and describes some of the factors that led to improving ROEs despite diminishing NIMs.

Tsuyoshi_Oyama_and_Shiratori_Tetsuya_-_Margins_Of_Japanese_Banks.pdf

Loukoianova_Elena_-_Changes_In_Japanese_Bank_Profitability.pdf

[PlanMaestro]

You guys are fantastic. Hat tip.