A friend of mine sent me a link to a CBC story about CIBC selling negative-rate bonds for the first time in Canadian history. Negative-rate bonds means they are guaranteed to lose money, and people are buying a lot of them – CIBC raised almost $1.8 billion. Crazy, eh?
Here’s how a negative-rate bond works. When you buy a bond, you’re basically loaning money to the business or government, and they promise to pay you the full value at a certain time in the future. To make you more interested in giving them your money, they give you interest payments along the way. Really, it’s a big IOU and you’re the loan shark.
When the bond has a negative rate, you’re giving say $100 to the business/government and they promise to pay you $95 back. Why would you do it? Because you think the world is going to hell in a hurry and this may be your best bet. At least you’ll have $95.
Like the loan shark you are, if you’re not paid back in time you can take the assets they put up as collateral, they can raise cash by charging their customers more or they can call in their own debts to help them pay you back (after you break their knees, of course). What assets do Canadian banks have? Mortgages. Ah, the plot thickens!
Canadian banks are strong and strongly regulated. The government wouldn’t let them get into the pissing contest between the US and the UK when those countries were deregulating themselves into a tizzy trying to create new ways of making money that eventually led to the 2008 economic collapse. So we trust our banks. When you’re scared, you turn to people and institutions you trust.
That’s why people are handing money over knowing they’ll get less back in the future. They’re scared.
Emotions are running high right now. Here in Canada business investment is slow and the Fort McMurray wildfires took a chunk out of our economic growth when oil production stopped, according to the Conference Board of Canada. Horrible things are happening all over (another attack in France; failed coup in Turkey; race relations in the US; the UK second-guessing its Brexit vote). C’mon, Donald Trump is a presidential candidate fer cryin’ out loud.
Fear, greed and hope. That’s what runs the economy.
My friend wants to keep his money tucked away in his sock drawer. Can’t say I blame him. (Of course there’s inflation, but that’s a post for another day.)