ML-Implode News - Is Pimco Right That Negative Yields Make Sense?

``It's still too soon to say his final conclusion --Â that people are "willing to accept a negative interest rate" to transfer purchasing power to the future --Â will stand the test of time. It's true thatÂ bonds with sub-zero yields haveÂ been around for yearsÂ and that the pile has nowÂ grown to a staggering $15 trillion. But as I wrote recently, much of that debt was issued with a positive interest rate, and those buyers have seen sharp price appreciation as a result. The true test is still to comeÂ when countries and even companies try to sell securities that pay no interest at a price above face value,Â guaranteeing a lossÂ if held to maturity.''

This argument is logical in the sense that, with financial economies so unstable, people might actually be able to pay a premium to "transfer purchasing power into the future". After all, that's pretty much the same as paying the carrying costs to hold cash (i.e., a bank account fee on a zero-yield checking account, or vault fees for cash), or storage fees for gold that, on average "goes nowhere". But what about inflation? This all assumes there's no inflation -- but at a minimum, the premium people are willing to pay implicitly must have an inflation rate subtracted from it. So if one is willing to take a 2% negative interest rate, one is likely assuming 0% inflation (or perhaps one would really be willing to pay a 4% negative interest rate, if it were not for 2% assumed inflation). The point being: if inflation really starts heating up in a general sense, these consumer-accepted negative interest rates will disappear real fast.

Relevant:

Is Pimco Right That Negative Yields Make Sense?