Paying to Lend – $13 Trillion in Negative-Yielding Bonds

Brian Burton

With nearly 20% of the global government bond market yielding negative interest rates, the question everyone wants answered is, who in their right mind is buying this stuff?  Investors in these bonds are paying more for them than they will ever receive back in interest and principal if they are held to maturity.  Zero return would be better, stashing cash in a Folgers can buried in the back yard is in theory a better alternative.  So who is signing up to lose money on these government IOU’s and why?



To better understand why negative-yielding bonds have continued to attract so many investors, let’s take a look at the three main groups of bond buyers.  The first and most prominent group of bond investors are those who must own government bonds, regardless of their yield.  This group includes pension funds, which are required to own a certain percentage of government bonds to match their liabilities; financial institutions, which need these bonds to meet liquidity requirements; and insurance companies, which invest a portion of their reserves in domestic and foreign government bonds.


The second group of buyers is made up of those investors who believe they can turn a profit on the bonds despite the negative yields.  For example, an investor who wants to make a bet on currency fluctuation may invest in a negative-yield bond if they think the currency they will be repaid in will appreciate more than the negative yield on the bond, resulting in a net gain.  Other investors in this group may buy bonds to make a bet on deflation.  For example, an investor buys a Switzerland 10Y government bond with a -1% yield, while deflation in Switzerland is expected to be 2% for the year, the investor has earned a real yield of 1%.  Another source of buyers in this group are expecting bond yields to go even further into negative territory.  With no end in sight to central bank stimulus, many investors are betting that bond prices have even more room to run.


The third group of bond buyers are those investors who have become anxious about the outlook for equity markets and are willing to pay a premium to keep their money safe.  When investors get nervous, they often times buy government bonds because usually governments pay back their debts, making these bonds a safe investment.  So when faced with the thought of losing 1% in a bond compared to the possibility of much larger losses in other asset classes, the negative-yielding bonds look like a haven, even if it means paying a government for the right to loan it money.

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