Thursday, May 31, 2012

Negative interest and fleeing rats

No, this is not going to be about the new movie--and colossal flop--Battleship. Rather, it's about another colossal flop: the Euro.

As the EU continues to struggle with economic problems in Greece, Italy, and Spain--with looming problems in many other countries--European investors are becoming more and more nervous. They're looking for safe havens where they can park capital, thus we see the dollar rising against the Euro (near a two-year low for the later). And nations in deep trouble--like Italy and Spain--are being forced to increase yields on government bonds, in order to sell any.

Enter the Swiss, the par excellence bankers of the world. In order to preserve capital, investors are actually taking a loss by having Switzerland hold their money.

We've all borrowed money or used a credit card before. We all know how it works. The borrowed money has to be repaid to the lender. And the reason why the lender agrees to loan the money in the first place is in order to collect interest on the debt. The longer it take the borrower to repay the loan, the more interest accrues, and it has to be paid, too.

Governments sell bonds with guaranteed rates of return, called bond yields. Essentially, people that buy the bonds are loaning governments money and the governments are paying the interest on the loan in the form of yields. Finance 101, right? The lender is the one that makes money off of the transaction, as a matter of course. Until now:
The Swiss government issued short-term debt bills worth 688.8 million francs ($716 million) Tuesday at a negative interest rate of 0.62 percent. That means investors are paying to lend money to Switzerland for three months.
European investors are so nervous about the future of the Euro that they're putting their money in Swiss notes (in the form of francs, not euros) and paying the Swiss government to hold it for them. The Swiss government is turning a profit by taking out loans. That's a helluva trick. Imagine going into a bank, getting a $10,000 loan and having the bank pay you $62 a month until you decide to repay the loan. What a bargain!

And the movement into negative interests rates for Swiss notes has happened very quickly, as this chart from Tyler Durden at Zerohedge indicates (with regard to 2-year notes):


From a positive rate of .8% in April of 2011 to a negative rat of .245% in just over a year's time; that's a serious shift in investor confidence, from pretty bad to incredibly bad. Clearly, European investors are not impressed with the plans coming out of Brussels, nor are they happy with the Greek and French election results, I would guess. They're fleeing the EU like rats deserting a sinking ship, to use the obvious metaphor.

Smoke 'em if you got 'em. Last one out, get the lights.

Cheers, all.

1 comment:

  1. Currency is such a crazy thing to trade. I made a bundle day-trading euros in the 90s once, but there's so much instability in the world, you could lose your shirt and not even know it until it was too late.

    I'll be sorry to see the Euro fail -- and the EU with it, because isn't that the next logical step?