Money for nothing

Hot dog is a product and you can buy it on the street. But it has a price. What if the price is $10? Or what about $5? What if I say $1? Does it sound better if I say I will pay you for every hot dog you buy? Anyway, that`s a great deal for you, and so is it for the money. It`s a product you can buy.

I can lend you some money, but what is the rate of interest? What if I say 10%? That`s a great deal for me. How about zero? Or even better, what if you can lend money from me, and at the end of the loan I pay you interest, just like a negative rate of interest. Is it fair?

Stack of $100 bills

Sorry buddy, but I`m not stupid. Of course I won`t pay you for a hot dog or money. I don`t know someone who will either. Do you know someone who would lend money for nothing? Or worse; who will lend money and get back less than the loan amount? No one I know.

People in Europe are looking for deals like this right now.

ECB`s QE is meant to reinvigorate Europe`s lethargic economies and prevent deflation. They started a bond-buying program on monday and investors knew that. They were positioned.

Germany issued 5-year bonds two weeks ago with negative interest rate, and they are not alone. Germany are joining a growing club of other countries in Europe who have done exactly the same. It may sound stupid, but investors do this because they want to make quick profit from it.

Investors was smart enough to think that ECB would buy German government bonds when they started the QE program on monday. But there is one problem; Germany runs a nearly balanced budget.

It means that they don`t issue many net new bonds. It might sell new bonds to replace those that mature, but investors already own those bonds. ECB came into the market as a new buyer and there weren`t any net new bonds.

The key question is this; price.

This is why investors was loading up before ECB`s bond-buying program. When Germany issued 5-year bonds, investors loaded up and waited for ECB to buy with both hands. The ECB must pay whatever price the market will bear to buy bonds. So what is the price?

Institutional buyers have been front-running the ECB program, and many of them have no intention of holding the bonds to maturity so the negative interest rate was of little consequence. As ECB work to devalue the euro, investors are repositioning themselves in stronger currencies, like the Swiss franc.

Since they want exposure to the stronger currency, they`re willing to pay negative interest rate on Swiss bonds.

Germany can afford to charge negative interest rates because of demand for their bonds from the ECB and the German Central Bank (the Bundesbank).

Non-euro countries like Switzerland are charging negative rates because they don`t want the hot money flowing into their currency. This is spilling over into the equity markets.

Private companies like Apple have started cashing in on the good, low and negative-interest rate deal for borrowers.

Apple have issued bonds in currencies like the Swiss franc because their cost of capital is so much cheaper than it would be in U.S dollars.

Apple issued bonds maturing in nine years at 0,375 percent interest and bonds maturing in 15 years at 0,75 percent.

Apple saved itself roughly 1,75 percent per year in interest by issuing bonds denominated in Swiss francs. 10-year U.S Treasury bonds yield is about 2,03 percent and 20-year bonds yield is 2,33 percent.

That`s not the whole story. Apple will use the money it raised to buy back shares and that will reduce the outstanding numbers of shares. With growing revenue and earnings, it can drive the stock price higher.

There is a risk in here, but in Apple`s case I don`t think they will struggle with this bet. They sold less than $1 billion in bonds, and has about $175 billion in cash stashed around the world, and the U.S dollar will remain strong.

Apple is a great example of how QE programs can drive interest rates lower and push the stock prices higher. Central banks are driving the markets.


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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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