Another thing that defies textbooks. On October 26 (last week) the Treasury Inflation-Protected Securities (TIPS) sold for the first time ever with a negative yield. What exactly does that mean?
TIPS are bonds that adjust for inflation. As inflation goes up, the principal goes up. As inflation goes down, the principal goes down. This provides a hedge or protection against inflation. So what does it mean that they sold at a negative yield?
It means that investors paid interest TO the government in order to lend money to the government instead of the government paying money to the investors to borrow money. It would be the same thing as if you went to your bank and said you wanted to take out a car loan but instead of you paying the bank interest on your loan, the bank instead loaned you the money and then also paid YOU interest just for the privilege to loan the money to you.
This is obviously one of those things the textbooks say can't happen, but it is happening. Welcome to the new reality.
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