Followup on Repo…

by Karl Denninger

In follow-up to my previous post on the Repo mess, here’s another thing to consider: Negative rate bonds.

Remember that these are guaranteed loss-making instruments if held to maturity. That is, you give a government $100,000, they give you back $99,000 (as an example) one year later. And so on.

The only way to make money on them is for rates to go more negative by enough that you can sell them for more than you paid because the new bond is even worse.

Now economists thought these could never be sold to anyone, anywhere, for that reason. They are a literal intentional cash bonfire with the only possible redemption being the continued stupidity of the issuer and people’s willingness to buy them. Note that in the US at least “Primary Dealers” in exchange for being the sole source of non-direct purchases are obligated to buy at the auctions.

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