July 8, 2016

The simple rule at the heart of finance is being broken

If you lend somebody money, they have to pay you back with interest. This is the basic premise of all finance, from street corner loan sharks to Wall Street loan sharks.

Bonds are sort of like loans—except you can trade them. Normally, if you buy a bond, the issuing government or corporation agrees to pay you interest. They don’t always make those payments—they default, go bankrupt, etc.—but that’s the way things are supposed to work.

No longer. With central banks pushing the limits of their ability to stoke growth, interest rates on many bonds are in negative territory, effectively turning the core rule of finance on its head. When investors buy bonds with negative interest rates, they’re agreeing to pay a borrower to take their money.

Read more at http://qz.com/613302/the-simple-rule-at-the-heart-of-finance-is-being-broken/

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