How the Fed is Saving Money Market Funds

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It was a sweetheart deal. Back in August 2019, the German government sold €824 million worth of AAA-rated 30-year bonds. Assuming that these bonds are held to their maturity in 2050, the investors who purchased them will get back €29 million less than they paid for them, or €795 million. I remember reading about this bond sale and thinking, “That’s the craziest thing I’ve ever heard. How fearful of the future must one be to do this?”

Locking-in a 30-year loss doesn’t appear to be a particularly savvy investment decision. I’m old enough to remember the concept of time value of money! Yet, bond purchasers assumed that in the future they would be able to flip these bonds for a profit when interest rates dropped even further into negative territory. That investment strategy hadn’t occurred to me.

It turns out that Germany is still making out well selling bonds that offer negative returns. In 2021, Germany borrowed $544 billion at an interest rate averaging -0.56%. In spite of the negative yield, according to US News & World Report, the bond auctions were oversubscribed 1.7 times. Are investors anticipating that interest rates will plummet even further?

Negative interest rates have become a feature of numerous national economies. These include the 19 euro-area countries where the short-term interest rate stands at -0.57%, as well Israel and Japan. Why haven’t negative interest rates hit our shores? The answer is found in the Fed’s now massive use of the reverse repurchase agreements, a mechanism for it to adjust the level of bank reserves, impact asset prices, and more.