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Rethink the 30-year German Bond with Negative Yield

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发表于 8-24-2019 12:25:20 | 显示全部楼层 |阅读模式
本帖最后由 choi 于 8-25-2019 10:39 编辑

(1) On Aug 22, 2019 I published a posting titled "Trump and Germany's 30-Year Bond."
(a) There, at paragraph (1)(a)(ii) I quoted

Paul J Davies and Patricia Kowsmann, German Long Bond's Yield Turns Negative. Wall Street Journal, Aug 22, 2019

as saying, "Investors buying debt at a negative yield get back less than they paid if they hold on until maturity. In Wednesday's sale, Germany borrowed €824 million ($914 million) through bonds that pay no interest [0% coupon]. The bonds were sold slightly above face value, so when they mature in 2050, Germany will pay back €795 million [which is the face value of principal].
(b) Also there, in paragraph (1)(b) I quoted

凝炼 and 李鱼(based on 德新社、路透社), 德国国债负利息 特朗普:凭什么!  德国之声, Aug 22, 2019

as saying, "德国第一次成功拍卖30年期国债挣了些钱。拍卖行动带来了平均0.11%的负收益率 [yield],使联邦政府得到小幅盈利."
(c) I was wrong to say "€795 million" was "the face value pf the principal " of the 30-year bond.

In fact, it is the "current value"
https://en.wikipedia.org/wiki/Current_Value
(think inflation)
of the face (or par) value of the bond buyers will receive (from Germany).  Put another way, after 30 years buyers of the bond at issue will LOSE money from the original €824 million to €795 million -- a loss of about 4% (which made me thinking for the past two days that this is not -0.11%, but larger).

The WSJ report did not mention the face value (I could not find out on Aug 22, but do today, see (2)). Buyers in 2050 will receive the face value of the bond. The problem is that on Aug 21, they paid slightly higher than the face value to obtain the bond -- although customarily zero-coupon bonds necessitates huge DISCOUNT (ie, much below face value).

The yield of -0.11 is a separate matter (of the bond), UNRELATED to the principal. Inother words, the buyers of the German 30-year bond on Aug 21, lost money on two fronts: principal due to future inflation (from which the majority of the loss stems) and no interest from lack of coupon. It is explained below.

(2) Press release: Invitation to Bid for 30-Year Federal Bond to Be Issued by Auction. Frankfurt: Deutsche Bundesbank, Aug 20, 2019
https://www.bundesbank.de/resour ... eibung-download.pdf
("For the account of the Federal Government, the German Finance Agency, through Deutsche Bundesbank, is offering for sale by auction:
0 % bond of the Federal Republic of Germany of 2019 (2050)
due on 15 August 2050
ISIN DE0001102481
envisaged issue volume (auction allotment and amount set aside for secondary market operations): € 2 billion

Due to the coupon of 0 % stripping is not possible.

* * * Bids must be for a par value of not less than € 1 million or an integral multiple thereof. The price bids must be expressed in terms of full 0.01 percentage points. * * *

Time schedule of the auction procedure:
Bidding period:         Wednesday, 21 August 2019,
from 8.00 a.m. until 11.30 a.m. Frankfurt time")

* Take notice that the par value is € 1 million.



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 楼主| 发表于 8-24-2019 12:26:10 | 显示全部楼层
(3) Zero-coupon bonds are actually common.
(a) Karen Rogers, How to Buy Zero Coupon Bonds. Zacks Investment Research, undated
https://finance.zacks.com/buy-zero-coupon-bonds-6725.html
("Zero coupon bonds, also known as zeros, are distinct in that they do not make annual interest payments. The bonds are sold at a deep discount, and the principal plus accrued interest is paid at the bond’s maturity date. The less you pay for a zero coupon bond, the higher the yield")
(b) Lisa Smith, Advantages and Risks of Zero Coupon Treasury Bonds. Investopedia, updated Dec 11, 2018
https://www.investopedia.com/art ... ro-coupon-bonds.asp
("Zero-coupon bonds are bonds that do not make any interest payments (which investment professionals often refer to as the 'coupon') until maturity. * * * Zero-coupon bonds come in many varieties. They may be issued by federal [US Deaprtment of Treasury], state or local governments [municipals or munis] or by corporations. Perhaps the version most familiar to many investors is the old Series EE savings bonds issued by the U.S. Treasury that were often given as gifts to small children. These bonds were popular because they could be purchased in small denominations. For example, a $50 bond could be purchased for $25. The child would keep the bond for several decades and then, when it matured, received $50. While the terms of the savings bond program has changed, and bonds are only available in electronic form, they still exist – and are still a valid example of how zero-coupon bonds work. * * * These entities [zero-coupon bonds or zeros] take a regular bond and remove the coupon to create a pair of new securities. This process, often referred to as 'stripping' (as the coupon is stripped away from the debt instrument), results in a zero-coupon bond that can be sold to investors")

(4)
(a) Bond Basics: An Investor's Guide to the Many Meanings of Yield. American Association of Individual Investors (AAII), undated
https://www.aaii.com/investing/a ... y-meanings-of-yield
("Yield to maturity (YTM) is a more comprehensive measure of potential return than 'current yield.' * * * YTM is the measure most widely quoted by brokers when selling individual bonds. * * * Total return for bonds consists of whatever you earn in interest income, plus or minus changes in the value of principal. (To be totally accurate, you would also subtract taxes and commission expenses from return)")

Please read two sections (only): yield and total return.
(b) Waiting for Death. "Woolly Thoughts" blog in Sentix.de, Aug 8, 2019 (yes, prior to issuance of the 30-year bond)
www.sentix.de/index.php/en/Wooll ... ting-for-death.html

consecutive paragraphs:

"Negative business [which is sectional heading]

"After all, what does this mean for those investors who today acquire German government bonds and hold them to maturity?

"If an investor today invests his money for three years in government bonds, he "receives" a negative interest rate of -0.89%. That is, he loses within three years surely 2,9% of his money. If, for example, he buys the 0% federal bond with a maturity of 7.10.2022 [Oct 7, 2022] today for 102.89%, he will receive only 100% back at maturity. This is not however the whole truth, because the investor must consider also still the inflation. This is currently 1.7% in Germany. This adds up to a purchasing power loss of around 5% within three years, provided the inflation rate remains unchanged. Makes a stately loss of value of more than 8% within 3 years!

"The calculation looks even starker if one were to buy 10-year federal bonds today. A non-interest-bearing federal bond with maturity 15.8.2029 currently costs 105.825%, so that a guaranteed minus of 5.8% is already certain for the investor at the time of purchase. In addition the inflation comes of 1-2%, so that one will lose with BUNDS within 10 years loosely 15-20% - with federal guarantee. In the meantime, 30-year bonds also have a negative yield, so that here, too, at 1.5% average inflation in 30 years, a minus of about 36% occurs.
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