Negative-yield mechanics – Nom de Plumber’s Thought of the Day

October 5th, 2011 · No Comments

  Nom de Plumber is a Nom de Plume.


Suppose that eventually the US government is able to auction Treasury securities at negative yields.   For counterparty-risk and operational purposes, negative coupons
would obviously not work.    So, instead, their coupons must be set at 0%, such that
investors would need to pay above 100:00 at initial settlement, but receive only 100:00 at maturity.   Many investors would then need to recognize principal losses, either
upfront or periodically.  Yet, by charter, many institutions are restricted from buying
principal-risky investments.

Such is how our Zero-Interest Rate Policy has cornered America.

Thank you.

Tags: Mortgage Market

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