12/10/2008

This is a real puzzle

Why would anyone put their money in a bond that paid negative interest? Why not just put the money under your mattress? Is a government bond safer than just holding cash? This seems very puzzling.

Treasuries rose, pushing rates on the three-month bill negative for the first time, as investors gravitate toward the safety of U.S. government debt amid the worst financial crisis since the Great Depression. . . .

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5 Comments:

Blogger Dad29 said...

Banks don't have mattresses, at least officially.

12/10/2008 8:54 AM  
Blogger Zendo Deb said...

Markets are not efficient. Not always. Especially not during panics. But even before people can do insane things.

Like invest in "internet companies" that have no chance - or little chance - of making money as was common in the 90s.

Or invest in tulip bulbs. Whenever that was. (It has been a long time since I read "Extraordinary Delusions and the Madness of Crowds.")

12/11/2008 12:30 AM  
Blogger James Drake said...

My theory is that it's a form of "window dressing" by institutional managers of mutual funds. Come quarterly report time they don't want to show a bunch of their assets to be in cash, earning nothing. So instead they buy T-notes with a positive coupon -- but a negative yield -- in the open market to fool current and prospective shareholders.

12/11/2008 12:49 AM  
Blogger Lergnom said...

Consider: a company puts 10 million dollars in an account at a bank.
A month later, they need those funds, but the bank has failed or been taken over, and FDIC insures deposits only to $100,000. So buying a 4-week T-bill just to get your money back makes a bit of sense, if one has no faith in the banking system.

12/11/2008 8:17 AM  
Blogger Martin G. Schalz said...

I too, did something similar to what you have posted here, Dr. Lott.

As far as the mattress goes, I would worry about theft.

After a long time of reading, watching, and getting a bad feeling about the market, I pulled all of my 401k investments out of any account that trended with the DJIA. Dumped everything into the Money Market Sep Acct. Low and behold, the Market took a major hit, but I didn't 'lose' any money (my 401k is still growing), and I am not keeping up with inflation, but at least I have preserved as much money as possible to invest when the Market rebounds, which was the goal that I set for myself.

12/13/2008 9:36 AM  

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