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I feel like I still don't understand negative yields, despite really trying to. Negative yields means that I put in $X (or euro/whatever germany is using) and

I feel like I still don't understand negative yields, despite really trying to. Negative yields means that I put in $X (or euro/whatever germany is using) and I later am guarenteed no more than $Y out of the exchange, where Y < X. I am literally guaranteed to lose money. I could just hold on to my money, "keep it under my mattress" and still make a better ROI than bonds with negative yields. Why would anybody buy these bonds?

andreilys 7y ago
From what I understand it’s moreso for institutional investors that have lots of capital they need to park somewhere. Making the bet that the gov will be around longer the bank But for retail investors who can store their money in a FDIC insured savings account it’s not clear why they would buy negative yield bonds.
- 0xffff2 7y ago
  So for an institutional investor, a negative yield bond is essentially a hedge against bank failure?
  - andreilys 7y ago
    Yea that’s a good way to think about it
    - md224 7y ago
      Does that mean a negative yield indicates a loss of trust in banks? That institutional investors are so desperate to avoid relying on banks that they're willing to take a loss on gov't bonds?
      - mdemare 7y ago
        No, institutional investors never put vast sums of money in banks, regardless of the yield.
  - ryanobjc 7y ago
    Also, look at it this way, if you have, let's say $5b on deposit at a bank, and you need to give it to someone else for some reason. Well transferring that money could destabilize the bank. They might refuse to let you withdraw it quickly. etc. Bonds are easily and instantly transferable privately without causing major market loss. This is the thing about huge finance like this, there's a gravity to money, and your intuitions from having bank accounts, money, etc, doesn't apply because entirely new problem appear you will never have. What if every time you paid a major bill at your credit union you threatened the solvency of that institution?
amadeusw 7y ago
I'm also curious about this. Does it mean that people are betting that $Y will be more valuable than future cash equivalent of $X due to inflation?
- lazyguy 7y ago
  No. Bonds are based on their money amount. So as money loses value due to inflation then so does the bond. If you want to hedge against inflation you would need to invest in something that either yields a positive return or something whose value isn't tied directly into a money amount, like land.
whatok 7y ago
A majority of institutional investors have investment mandates which limit them in the amount of cash they can hold. Additionally, if you think there's no chance of EU inflation going forward, even if these are negative yielding securities, you will still have a price return on these. 30yr Bunds were yielding 0.875% at the beginning of the year and have recently gone negative. If you were benchmarked against them and at the beginning of the year decided to either move to cash or short them, you more than likely lost your job.
whyaduck 7y ago
It's cheaper than a bank vault and more secure than a home safe. I can't think of any other reason to buy them, though.
- cameldrv 7y ago
  Can't banks just deposit the money as reserves with the ECB and earn zero? I suppose in the 30 year case maybe you're assuming that the ECB won't pay zero on reserves in the future, but how does that explain the short term rates?
  - qubex 7y ago
    The ECB’s rates are short-term; who’s to say that they won’t turn acutely negative for at least some proportion of the next three decades? These rates are “locked-in”, provided you hold the bond to maturity (and might have an upside later on).
  - ryanobjc 7y ago
    Can they? Most 'central banks' dont really offer banking services. Eg: you can't deposit to the federal reserve. So the question is what to do with your money, that is both (a) easily transferable (b) auditable (c) safe Government bonds are the traditional answers to these. They offer all of a,b,c. And until now they even offered extra money, aka interest, as bonus. I think the best way to understand bonds is the old fashioned paper bonds. There was 2 parts: a primary part representing the money down, and a detachable 'coupon', say 5 of them for yearly interest for five years. So every year you'd bring the appropriate coupon in and get your interest. At the end, you'd get your money back which is represented by the main bond. Or more likely trade it for another bond. All this means is the coupons now represent how much you have to PAY the government for issuing the bond. So it's more like a maintenance fee, rather than 'interest'. Or another analogy, safe deposit box fee. Bank account fees. Etc. Money in the mattress, in physical vaults, safe deposit boxes all have the following property: (a) difficult to value (gotta count all those bills! who's doing the counting? is it auditable? did any 'shrink' somehow?) (b) costs quite a bit of money to just store ($100m is a lot of bills! it weighs a lot! it can get set on fire!) (c) not so easy to transfer. As a result of all of the above, it's unlikely to be usable as collateral. Since the primary target is banks, they need 'liquid' assets that they can present to their auditors to prove they have reserves for their deposits.
devoply 7y ago
Because the interest rate will soon be less than the bonds. Negative interest rates coming down the pipe globally. Only way that I can see it getting justified.
- freeflight 7y ago
  The writing has been on the horizon for a while already [0] [0] https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2283~2ccc074964.en.pdf?fbb6d4de645fdd3ea2f6b24834bfd82c https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2283~2ccc0749...
- nemo44x 7y ago
  Not sure why this is downvoted but there's possible truth to this. In addition, these bonds could in fact make you a lot of money in the short term if the interest rate for these bonds continue to get more negative.
- kgwgk 7y ago
  > Because the interest rate will soon be less than the bonds What interest rate are you talking about? The interest rate for all the other maturities was already negative.
DSingularity 7y ago
The only reason I can think of is to mitigate the downside risk of financial collapse. These are banks buying these bonds. Banks which might be worried that short term financial pressures might tempt the governments might to reach for their cash positions. I would rather hold some negative-yield bonds instead of cash in that scenario.
- rightbyte 7y ago
  Why would said government not reach for the bounds or just not buy them back if they issued them?
romaaeterna 7y ago
If it's a large amount of money, you might decide to put it in a bank so that you don't have to worry about it being stolen. Once it is in a bank now you have to play the game of trying to figure out the comparative risk between the bank not being around any more 30 years from now, versus the chance that the German government will have forgotten how to operate the money printing presses. Of course, since this is the EU, I'd actually be rather worried about the latter. Unlike sovereign currency countries, EU countries do not just get to print Euros. A lot can happen in 30 years, especially to a country with 1.5 births per woman like Germany.
- romaaeterna 7y ago
  Do any of the people downvoting recall what happened recently to all those Greek Euro-denominated government bonds? Of course, that could never ever ever happen in Germany? Not even in 30 years? Let's hear an explanation.
  - mdemare 7y ago
    It could, but there still isn’t anything safer than German bonds.
  - merb 7y ago
    > Of course, that could never ever ever happen in Germany? Not even in 30 years? Let's hear an explanation. well anything can happen. I mean I live in germany and I can totally see that happen. our biggest industry needs a lot of breaking changes or else they will fail pretty hard. and they have less than 30 years to do so
- pergadad 7y ago
  Yeah I don't get the impression that you know too well what you are talking about if you don't know the difference between the EU and the Eurozone. Even if the euro were to break up/be abolished and resolve back to smaller currencies there would be a conversion key. The chance that the renmenbi, GBP, yen or even the dollar will have major issues look a lot more likely in the current climate - the renmenbi is still struggling to become a global currency and everyone can see the political struggles on the horizon, the GBP will continue it's free fall after the disastrous Brexit and the following depression, the dollar is widely overdue for a correction and will lose out if eg China starts dumping their reserves, not to speak of the endless debt spiral the us is in - similarly for the yen, with the high debt it looks unlikely to be a stable currency in the long term (even if it's mostly local debt). That doesn't leave too many options - with the euro a fairly stable option as long as people remember the nightmares of Europe pre-euro (and most outside the anglophone bubble do): huge costs and price uncertainty in cross border trade, big financial players gambling and manipulating against smaller currencies (as you still see in Africa today), and overall little trust in the local currencies. Trust in the euro (not necessarily the EU as a whole, as it is a target for much local political hate & lies when it's easier to blame Brussels than accept responsibility for mistakes) is at an all-time high, with not even Italians wanting to give it up. No one wants the lira or drachma back.
whatshisface 7y ago
If you take out a bunch of cash you have to store it. If you move it to an international market you suffer currency risk. If you think that the Euro is going to go up like crazy (if you forecast deflation) and you also think that every other European government has a pretty bad default risk, then you'll happily accept negative yields. Don't forget that it costs money to guard a warehouse full of cash.
- deleted 7y ago
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Jorge1o1 7y ago
Certain investment funds and pension funds have mandates that require them to buy investment grade or sovereign debt
- mrfredward 7y ago
  It's quite terrifying to think that pension funds are using forecasts of healthy returns to claim they are well funded, whilst simultaneously making investments with guaranteed negative returns.
  - gowld 7y ago
    There's nothing particularly terrifying about "negative". What's terrifying is the delta between forecasts and actual returns. Forecasting 8% vs actual 2% is much more terrifying that forecasting 1% vs actual -1%.
jldugger 7y ago
If you have several million Euros to invest in fixed income securities, that would be a very large mattress. Even if you deposit it in a bank, what do they do with the money if yields are negative? Charge rent for the space, I guess.
turk73 7y ago
It's a fee for them to hold onto your money because you're a big institution and required by laws or regulations to hold a certain percentage in "safe" bond type investments.
rabidrat 7y ago
Individual investors would probably not buy these. It's a lot harder to keep $100m under the proverbial mattress: not FDIC-insurable, literal cash requires guards, etc. And anything else you buy to store the value (gold for instance) has higher volatility and risk than these negative-interest bonds. So the theory would go, anyway.
- novaRom 7y ago
  Individual investors still can buy. For example, if I am sitting on too many dollars and expect that Euro will be significantly stronger than dollar in 30 years, I can diversify a little bit. Same applies to other currencies.
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ww520 7y ago
This will make better sense if you treat money as a trading product with supply and demand. Negative yield on an investment means the banks and investors believe the amount of money will shrink in 30 years due to less demand in the future or too much supply right now. They further believe that the yield while negative is still better than the amount of money shrinkage down the line. Thus a negative yield investment is still a sound investment.
dcolkitt 7y ago
A lot of financial transactions and central clearinghouses require participants to post collateral. For example if an insurance company enters into an interest rate swap with a bank, both sides will have to post some percent of the contract's notional value in escrow. This protects both sides from counterparty risk (i.e. what if the insurance company goes out of business and can't pay its side of the swap). The collateral needs to take the form of low-risk, liquid securities. Usually government bonds. Bringing a big bag full of cash to a derivatives exchange is not accepted. If you're a big financial institution, you have no choice but to buy government bonds. Even if they're negative yielding. Since 2008, there's been a massive increase in financial regulations. Policy-makers have desperately pushed to make banks and other financial institutions less risky. That mostly means much higher capital requirements and more central clearing. In turn that means the demand for holding high-quality government has exploded.
- pergadad 7y ago
  In cas that's not obvious I just want to add that the collateral allows you to only keep a fraction of what you're investing in actual collateral. The exact numbers depend on context, but imagine you buy/hold collateral and for that can loan/borrow five or ten or twenty times as much.
- TheSoftwareGuy 7y ago
  Why would a derivatives exchange not accept cash? what are people buying those derivatives with? Furthermore, how could any bond (or anything at all for that matter) be less risky than cash? the market value of a bond may change over time but $1 will always be worth $1. Inflation may change the purchasing power of that dollar but then the exact same mechanism will effect the bonds as well.
  - dmoy 7y ago
    Cash has risks: * risk of physical destruction * risk of physical theft * risk of forgery etc etc There's some nonzero cost to accept, handle, vet, store, etc for cash. That's not even including if there are extra reporting laws or other for large amounts of cash, which just adds to the overhead.
qubex 7y ago
This means that lending money to the German federal government is considered less risky than just “holding onto your money”. You might think of money as a physical asset (cash), but really it’s far more varied, and for amounts that exceed insured deposit thresholds, you are not protected by the risk of failure (or “bail-in”) of a banking institution. Besides, as others have pointed out, these make little sense from the point of view of an individual investor and are going to be parts of more integrated risk-calibrated portfolios of assets.
- camjw 7y ago
  I think with quantitive easing this analogy isn’t really true anymore: there is a guaranteed buyer (the ECB) propping up the price of German sovereign debt, so making the yields artificially low.
  - qubex 7y ago
    I’ll definitely grant you that quantitative easing complicates the picture, but i it does so in ways far more complicated than you describe: firstly, the ECB buys at secondary-market prices, so the “flight to quality” effect is still there, albeit perhaps in muted form; furthermore, keep in mind that the ECB can and probably will resell those bonds that it does purchase at a later date when it will want to wind down it’s balance-sheet. Other effects also apply. Negative yields however probably do represent a true aversion to risk on behalf of investors, in some capacity or another.
miohtama 7y ago
If you put a lot of money in a bank then there is a counterparty risk the bank defaulting or you getting a haircut. Money in a bank is no longer "yours". Some hardcore asset management schemes store physical US bills in a high security storage. You will pay % negative yield on yearly storage cost, but cash is truly yours and you can withdraw any day. Also in the EU, with some fintech startups, you can now open a bank account which comes with a IBAN number from a central bank of Lithuania - essentially your money is stored within European Central Bank system. You will have negative ECB interest and pay some extra, but there is no counterparty risk unless the whole European banking system collapses.
- semi-extrinsic 7y ago
  It should be noted that "a lot of money" in this context means more than whatever limit your country has on deposit insurance. In the US, up to $250k is insured by the government against default, and it goes per account type and per bank, so you could easily store, say, $2M fully insured. But of course, this does not insure you against systemic risks. When the financial system in Iceland broke down, depositor insurance meant nothing. Another popular way of storing large amounts of money over long time, is to invest in real estate. Buy apartments in central Paris, London, New York. Very small risk that you lose anything, especially in real terms, if you can keep a cool head about when to sell. Downside is that these are not liquid assets.
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kazinator 7y ago
Suppose you had half a billion dollars or whatever. You could get it in cash. You can't put that under a pillow. You'd need a really secure vault to guard this cash against theft and accidental destruction (fire, flood). In the best case, nothing happens to the money, so it retains its full numeric value, but that vault costs money to rent and operate, and those costs add up to negative yield. That effective negative yield of the vault could be more negative than the negative bond, making the bond more attractive. The negative bond could be more attractive even if it costs more than the vault, because of lower risk.
- novaRom 7y ago
  How then a bond is different? It is also either a physical thing or a record in DB; both cases require protection and security.
  - kazinator 7y ago
    A bond is a registered contract that names specific parties, whereas cash is a manifestation of value associated with whoever bears it. (There are bonds like that; bearer bonds.) Stealing bonds would have to be an information crime; surreptitiously rewriting the identity of the investor on all copies of the contract in existence. Or something like that.
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snowwrestler 7y ago
There are dozens of answers here that explain why institutions buy sovereign debt, in general. What those comments don't explain is why anyone would buy this particular sovereign debt. So: why would anyone buy negative-interest-rate German bonds when U.S. Treasury bonds still have positive interest rates, and are available in much higher volumes?
- DubiousPusher 7y ago
  Diversification. Spreading your money across many governments which are unlikely to default is better than putting it all in one.
  - antaviana 7y ago
    With diversification you decrease the risk of losing everything and increase the risk of losing something.
- hendzen 7y ago
  https://en.wikipedia.org/wiki/Interest_rate_parity https://en.wikipedia.org/wiki/Interest_rate_parity
  - mdemare 7y ago
    Yes. The difference in interest rates implies that the EURUSD exchange rate is expected to rise (slowly) in the coming decades.
- camjw 7y ago
  Because you’re a European and have to pay your taxes (or your investors, or other people) in euros, so don’t want any exposure to the Euro/Dollar exchange rate.
- graedus 7y ago
  I think there are laws stating that certain kinds of German institutions must buy German bonds, but I'm not sure.
tryitnow 7y ago
This is an example of how to write a good article, I think the first sentence answers your question: "Germany sold 30-year debt at a negative yield for the first time, as investors desperate for safe assets bet that further falls in yields will boost the value of the bonds in the future." The investors buying these bonds are simply betting that these bonds will increase in value (which will supposedly happen if central banks cut interest rates more in the future). These bonds don't pay out for 30 years and I bet few if any of the institutions buy them intend to hold them that long, they plan to sell when the value of the bonds rise. So why not just park that money in cash? Well let's say you have $1M and you think bond yields will continue to fall. If bond yields fall further, then the value of these bonds increase, then you can sell them and realize a return. However, you also want to think about any way that your cash holdings could increase. Could a dollar (or euro, or whatever currency) tomorrow be worth more than a dollar today? Yes, if there's deflation then it could make sense to just hoard cash under your mattress and realize that it's purchasing power is growing! But these investors are assuming deflation is not too much of a risk - they believe central banks will act to quickly slash interest rates - both increasing the value of these bonds and decreasing the risk of deflation. Markets are pricing in future interest rate cuts, which is probably not a bad bet to make. Markets a probably predicting interest rate cuts because they think various economies are weakening and central banks will cut rates.
- nostrademons 7y ago
  The implication then is that we're in a bond bubble. When you're buying something that you know has negative fundamental returns on the assumption that someone will buy it from you at a higher price, that's the definition of a bubble. And like many bubbles, it's entirely possible they'll be right in the short term, but it's basically guaranteed that they'll be wrong in the long term. You know exactly what a bond will be worth in 30 years, and with negative interest rates, you know it'll be worth less than now.
  - unreal37 7y ago
    Expecting the price of something to rise in the future is not the definition of a bubble. When people were selling houses in Detroit at the bottom of the housing crisis for $1000, the people buying them were expecting the value to rise in the future. It's almost like profiting off of fear not greed.
pfortuny 7y ago
Well, bonds are easier to deal with than cash AND you do not run the risk of binge-spending them. In some sense, bonds “do not burn” whereas your house may, or tour bank account may collapse, etc. The premium is the guarantee.
- hsk823 7y ago
  Assuming the sovereign debt is actually still good. Countries do default on their debts
lazyguy 7y ago
> I feel like I still don't understand negative yields, despite really trying to. There isn't anything to understand. It's banking lunacy. You only put money into negative yields if you are forced to do it.
rolltiide 7y ago
Your confusion comes from focusing too much on what happens at maturity. This is the least important thing here. Bonds have two ways of providing a return. The yield, and the price of the bond itself. Lower yield means greater price of the bond. They are always inversely correlated. Even lower yield means even greater price of the bond. Because of worldwide policies, Its a bond bull market. The greatest bond bull market of all time and there is no exit. Government creates new bonds at market price. Their independent Central Bank buys those bonds at market price giving newly created money to the government or traders. Market price is always a premium to the prior price. This action devalues the currency, otherwise known as causes inflation, otherwise known as people’s share in the currency stock is diluted. So nobody needs to care about the yield. Nobody is thinking “well golly I’m going to use a few fractions of a dollar for the next 30 years” theyre thinking bonds to the fckin moon Buy high sell higher directly to the central bank. Benign attempts at economic stimulus have turned into a full blown currency war between monetary unions and nation states. The whole point is to get people to think “hm maybe my money isnt doing so well in a bank or in my mattress, maybe I should circulate it in risky investments” , and since people are so willing to pay for the privilege not to do that, the yields will go deeper negative. This prompts other monetary unions to cry foul and consider these actions unfair and uncompetitive, and so they do the same thing to devalue their currency to compete. Any time you hear someone talk about responding to currency manipulators or reacting to the trade war by lowering rates or devaluing their own currency, just remember: Bond. Bull. Market.
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darksaints 7y ago
Could you though? Inflationary and deflationary forces are constantly at work modifying the value of the money you have under your mattress.
cVwEq 7y ago
One way to make money is if you sell the bond at a higher price later to another buyer. From the article: “Why are people buying at negative yields? It is mainly in expectation that you’re going to be able to sell to someone at a higher price later on,” said Andrea Iannelli, investment director, fixed income at Fidelity International. “Whatever the yield you have to assume you’re going to make more on the capital gain than lose on the yield.” So Y < X, but if you bet you can sell at price Z to another buyer later, Z > X and you profit. As an analogy I just thought up: it's kind of like overpaying for a house, thinking that in time the house value will appreciate.
- madcaptenor 7y ago
  Or just paying for a house, thinking it will appreciate. (The "yield" of a house is negative, because it costs money to keep the thing in the same condition you bought it in, as anyone who owns a house knows.)
dpkingma 7y ago
Held individually the negative-yield bonds don't make much sense. However, they can actually improve the risk-adjusted returns of a portfolio that also holds stocks. This is because long-term bonds have, in the past decade, been negatively correlated with stocks [1,2]. [1] https://imgur.com/a/r9nCsN5 https://imgur.com/a/r9nCsN5 [2] https://www.portfoliovisualizer.com/asset-correlations?s=y&symbols=TLT%2CSPY&timePeriod=1&tradingDays=120&months=36 https://www.portfoliovisualizer.com/asset-correlations?s=y&s...
jpadkins 7y ago
putting cash under your mattress has security costs. For < 1k euro, probably not worth calculating. But for > 1M euro, there is a real security cost to keeping that amount of cash safe for 30 years. I may be totally wrong, but I think the floor on negative yields is going to be the security costs of keeping cash for that timeframe.
gnopgnip 7y ago
A negative rate bond or CD is not fundamentally different from a normal one, you pay a set amount now and in the future you get a guaranteed payout at a future date. Except that instead of making money on the interest, you pay a little. The banks offer these products because they still make money on the fees, and on the arbitrage from loaning out the invested funds at a higher rate(or by doing nothing with a negative rate), or by bundling and selling the securities. This can still be a good option for buyers compared to investing in junk bonds or CDs that pay higher rates, or in stocks and mutual funds because what is important is the risk adjusted return and not just the yield. There are costs/risks associated with keeping a pile of cash in a vault or stuffed in a mattress, or sitting in another type of account that is not insured. If you expect interest rates to decrease even more buying a bond or CD can make money because you can sell it for more in the future, even with a negative rate. The big one is that in certain cases there are requirements to purchase CDs or treasury bonds by law, or as part of a contract, or by the governing docs of a company instead of just holding "cash". For an individual, you would be unlikely to purchase these because the cost/risk of holding cash in a bank account is minimal and some type of insurance likely covers it, and most individuals want higher returns and would rather invest in index or mutual funds than CDs even if they had positive returns. And if you think that interest rates will drop in the future and you can sell the bond for more, you are still more likely to buy higher yield bonds with higher risk.
hogFeast 7y ago
If it makes you feel any better, central banks don't either. Your question is actually fairly straightforward: people own these bonds because they have to. Most countries have regulations that force institutions to own these securities. The more important question is actually: if you are a bank, what do you do now? You have to pay to lend money to people, it costs you 1%/year to just keep the lights on. In Japan, most banks are (again) effectively insolvent. Germany is moving that way...and yes, the "point" of this action (according to central bankers) was to support banks...but it will likely end in most banks in affected countries going out of business. ...but don't worry, the central bankers will produce a brand new plan compose of intricate theories that clearly show how intelligent they are and how this totally wasn't their fault.
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JumpCrisscross 7y ago
> I still don't understand negative yields Safe assets sell a service: they’re a safe place to put your money. For this service, you pay a fee. There are other places to put your money, from cash to money market accounts to listed equities, but they aren’t safe. (They compensate for this unsafeness by promising you a return.)
- teambayleaf 7y ago
  Why not just putting aside that cash pile? I don't get why you want to exchange it with securities and pay negative yields.
beamatronic 7y ago
It could get stolen from under your mattress. Bugs could eat it. It could catch on fire. You would buy one of these negative bonds as a safer alternative to the risks above. This product may not be for you, but someone would be willing to make this trade.
arcticbull 7y ago
Currency is mildly decoupled from purchasing power. Here's how you look at it. You give me $20K today, and I promise to give you $19K back in 30 years. The question is two-fold. (1) What else would you do with that money, that would offer you a better return, factoring all externalities. Holding cash isn't free once you account for risks like getting robbed holding bills your house burns down, you get fake bills, and potentially-negative interest rates at a bank. If you see the market going down you're not going to put it there either. (2) How much will $20K today dollars buy you as compared to $19K future dollars? If you're betting on deflation, then that $19K future dollars may buy you a house where $20K today dollars may buy you a car.
- rags2riches 7y ago
  (3) what will the best offer to hold $20K be tomorrow? If it's even worse, I can sell my $19K promise and make a profit! (Falling yields means raising prices.)
nyokodo 7y ago
You can probably write off the losses on your tax filings also. That may play into it.
megaremote 7y ago
> I could just hold on to my money, "keep it under my mattress" and still make a better ROI than bonds with negative yields. Why would anybody buy these bonds? You think you would do that for millions and billions?

andreilys 7y ago

From what I understand it’s moreso for institutional investors that have lots of capital they need to park somewhere. Making the bet that the gov will be around longer the bank But for retail investors who can store their money in a FDIC insured savings account it’s not clear why they would buy negative yield bonds.

0xffff2 7y ago
So for an institutional investor, a negative yield bond is essentially a hedge against bank failure?
- andreilys 7y ago
  Yea that’s a good way to think about it
  - md224 7y ago
    Does that mean a negative yield indicates a loss of trust in banks? That institutional investors are so desperate to avoid relying on banks that they're willing to take a loss on gov't bonds?
    - mdemare 7y ago
      No, institutional investors never put vast sums of money in banks, regardless of the yield.
- ryanobjc 7y ago
  Also, look at it this way, if you have, let's say $5b on deposit at a bank, and you need to give it to someone else for some reason. Well transferring that money could destabilize the bank. They might refuse to let you withdraw it quickly. etc. Bonds are easily and instantly transferable privately without causing major market loss. This is the thing about huge finance like this, there's a gravity to money, and your intuitions from having bank accounts, money, etc, doesn't apply because entirely new problem appear you will never have. What if every time you paid a major bill at your credit union you threatened the solvency of that institution?

amadeusw 7y ago

I'm also curious about this. Does it mean that people are betting that $Y will be more valuable than future cash equivalent of $X due to inflation?

lazyguy 7y ago
No. Bonds are based on their money amount. So as money loses value due to inflation then so does the bond. If you want to hedge against inflation you would need to invest in something that either yields a positive return or something whose value isn't tied directly into a money amount, like land.

whatok 7y ago

A majority of institutional investors have investment mandates which limit them in the amount of cash they can hold. Additionally, if you think there's no chance of EU inflation going forward, even if these are negative yielding securities, you will still have a price return on these. 30yr Bunds were yielding 0.875% at the beginning of the year and have recently gone negative. If you were benchmarked against them and at the beginning of the year decided to either move to cash or short them, you more than likely lost your job.

whyaduck 7y ago

It's cheaper than a bank vault and more secure than a home safe. I can't think of any other reason to buy them, though.

cameldrv 7y ago
Can't banks just deposit the money as reserves with the ECB and earn zero? I suppose in the 30 year case maybe you're assuming that the ECB won't pay zero on reserves in the future, but how does that explain the short term rates?
- qubex 7y ago
  The ECB’s rates are short-term; who’s to say that they won’t turn acutely negative for at least some proportion of the next three decades? These rates are “locked-in”, provided you hold the bond to maturity (and might have an upside later on).
- ryanobjc 7y ago
  Can they? Most 'central banks' dont really offer banking services. Eg: you can't deposit to the federal reserve. So the question is what to do with your money, that is both (a) easily transferable (b) auditable (c) safe Government bonds are the traditional answers to these. They offer all of a,b,c. And until now they even offered extra money, aka interest, as bonus. I think the best way to understand bonds is the old fashioned paper bonds. There was 2 parts: a primary part representing the money down, and a detachable 'coupon', say 5 of them for yearly interest for five years. So every year you'd bring the appropriate coupon in and get your interest. At the end, you'd get your money back which is represented by the main bond. Or more likely trade it for another bond. All this means is the coupons now represent how much you have to PAY the government for issuing the bond. So it's more like a maintenance fee, rather than 'interest'. Or another analogy, safe deposit box fee. Bank account fees. Etc. Money in the mattress, in physical vaults, safe deposit boxes all have the following property: (a) difficult to value (gotta count all those bills! who's doing the counting? is it auditable? did any 'shrink' somehow?) (b) costs quite a bit of money to just store ($100m is a lot of bills! it weighs a lot! it can get set on fire!) (c) not so easy to transfer. As a result of all of the above, it's unlikely to be usable as collateral. Since the primary target is banks, they need 'liquid' assets that they can present to their auditors to prove they have reserves for their deposits.

devoply 7y ago

Because the interest rate will soon be less than the bonds. Negative interest rates coming down the pipe globally. Only way that I can see it getting justified.

freeflight 7y ago
The writing has been on the horizon for a while already [0] [0] https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2283~2ccc074964.en.pdf?fbb6d4de645fdd3ea2f6b24834bfd82c https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2283~2ccc0749...
nemo44x 7y ago
Not sure why this is downvoted but there's possible truth to this. In addition, these bonds could in fact make you a lot of money in the short term if the interest rate for these bonds continue to get more negative.
kgwgk 7y ago
> Because the interest rate will soon be less than the bonds What interest rate are you talking about? The interest rate for all the other maturities was already negative.

DSingularity 7y ago

The only reason I can think of is to mitigate the downside risk of financial collapse. These are banks buying these bonds. Banks which might be worried that short term financial pressures might tempt the governments might to reach for their cash positions. I would rather hold some negative-yield bonds instead of cash in that scenario.

rightbyte 7y ago
Why would said government not reach for the bounds or just not buy them back if they issued them?

romaaeterna 7y ago

If it's a large amount of money, you might decide to put it in a bank so that you don't have to worry about it being stolen. Once it is in a bank now you have to play the game of trying to figure out the comparative risk between the bank not being around any more 30 years from now, versus the chance that the German government will have forgotten how to operate the money printing presses. Of course, since this is the EU, I'd actually be rather worried about the latter. Unlike sovereign currency countries, EU countries do not just get to print Euros. A lot can happen in 30 years, especially to a country with 1.5 births per woman like Germany.

romaaeterna 7y ago
Do any of the people downvoting recall what happened recently to all those Greek Euro-denominated government bonds? Of course, that could never ever ever happen in Germany? Not even in 30 years? Let's hear an explanation.
- mdemare 7y ago
  It could, but there still isn’t anything safer than German bonds.
- merb 7y ago
  > Of course, that could never ever ever happen in Germany? Not even in 30 years? Let's hear an explanation. well anything can happen. I mean I live in germany and I can totally see that happen. our biggest industry needs a lot of breaking changes or else they will fail pretty hard. and they have less than 30 years to do so
pergadad 7y ago
Yeah I don't get the impression that you know too well what you are talking about if you don't know the difference between the EU and the Eurozone. Even if the euro were to break up/be abolished and resolve back to smaller currencies there would be a conversion key. The chance that the renmenbi, GBP, yen or even the dollar will have major issues look a lot more likely in the current climate - the renmenbi is still struggling to become a global currency and everyone can see the political struggles on the horizon, the GBP will continue it's free fall after the disastrous Brexit and the following depression, the dollar is widely overdue for a correction and will lose out if eg China starts dumping their reserves, not to speak of the endless debt spiral the us is in - similarly for the yen, with the high debt it looks unlikely to be a stable currency in the long term (even if it's mostly local debt). That doesn't leave too many options - with the euro a fairly stable option as long as people remember the nightmares of Europe pre-euro (and most outside the anglophone bubble do): huge costs and price uncertainty in cross border trade, big financial players gambling and manipulating against smaller currencies (as you still see in Africa today), and overall little trust in the local currencies. Trust in the euro (not necessarily the EU as a whole, as it is a target for much local political hate & lies when it's easier to blame Brussels than accept responsibility for mistakes) is at an all-time high, with not even Italians wanting to give it up. No one wants the lira or drachma back.

whatshisface 7y ago

If you take out a bunch of cash you have to store it. If you move it to an international market you suffer currency risk. If you think that the Euro is going to go up like crazy (if you forecast deflation) and you also think that every other European government has a pretty bad default risk, then you'll happily accept negative yields. Don't forget that it costs money to guard a warehouse full of cash.

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Jorge1o1 7y ago

Certain investment funds and pension funds have mandates that require them to buy investment grade or sovereign debt

mrfredward 7y ago
It's quite terrifying to think that pension funds are using forecasts of healthy returns to claim they are well funded, whilst simultaneously making investments with guaranteed negative returns.
- gowld 7y ago
  There's nothing particularly terrifying about "negative". What's terrifying is the delta between forecasts and actual returns. Forecasting 8% vs actual 2% is much more terrifying that forecasting 1% vs actual -1%.

jldugger 7y ago

If you have several million Euros to invest in fixed income securities, that would be a very large mattress. Even if you deposit it in a bank, what do they do with the money if yields are negative? Charge rent for the space, I guess.

turk73 7y ago

It's a fee for them to hold onto your money because you're a big institution and required by laws or regulations to hold a certain percentage in "safe" bond type investments.

rabidrat 7y ago

Individual investors would probably not buy these. It's a lot harder to keep $100m under the proverbial mattress: not FDIC-insurable, literal cash requires guards, etc. And anything else you buy to store the value (gold for instance) has higher volatility and risk than these negative-interest bonds. So the theory would go, anyway.

novaRom 7y ago
Individual investors still can buy. For example, if I am sitting on too many dollars and expect that Euro will be significantly stronger than dollar in 30 years, I can diversify a little bit. Same applies to other currencies.

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ww520 7y ago

This will make better sense if you treat money as a trading product with supply and demand. Negative yield on an investment means the banks and investors believe the amount of money will shrink in 30 years due to less demand in the future or too much supply right now. They further believe that the yield while negative is still better than the amount of money shrinkage down the line. Thus a negative yield investment is still a sound investment.

dcolkitt 7y ago

A lot of financial transactions and central clearinghouses require participants to post collateral. For example if an insurance company enters into an interest rate swap with a bank, both sides will have to post some percent of the contract's notional value in escrow. This protects both sides from counterparty risk (i.e. what if the insurance company goes out of business and can't pay its side of the swap). The collateral needs to take the form of low-risk, liquid securities. Usually government bonds. Bringing a big bag full of cash to a derivatives exchange is not accepted. If you're a big financial institution, you have no choice but to buy government bonds. Even if they're negative yielding. Since 2008, there's been a massive increase in financial regulations. Policy-makers have desperately pushed to make banks and other financial institutions less risky. That mostly means much higher capital requirements and more central clearing. In turn that means the demand for holding high-quality government has exploded.

pergadad 7y ago
In cas that's not obvious I just want to add that the collateral allows you to only keep a fraction of what you're investing in actual collateral. The exact numbers depend on context, but imagine you buy/hold collateral and for that can loan/borrow five or ten or twenty times as much.
TheSoftwareGuy 7y ago
Why would a derivatives exchange not accept cash? what are people buying those derivatives with? Furthermore, how could any bond (or anything at all for that matter) be less risky than cash? the market value of a bond may change over time but $1 will always be worth $1. Inflation may change the purchasing power of that dollar but then the exact same mechanism will effect the bonds as well.
- dmoy 7y ago
  Cash has risks: * risk of physical destruction * risk of physical theft * risk of forgery etc etc There's some nonzero cost to accept, handle, vet, store, etc for cash. That's not even including if there are extra reporting laws or other for large amounts of cash, which just adds to the overhead.

qubex 7y ago

This means that lending money to the German federal government is considered less risky than just “holding onto your money”. You might think of money as a physical asset (cash), but really it’s far more varied, and for amounts that exceed insured deposit thresholds, you are not protected by the risk of failure (or “bail-in”) of a banking institution. Besides, as others have pointed out, these make little sense from the point of view of an individual investor and are going to be parts of more integrated risk-calibrated portfolios of assets.

camjw 7y ago
I think with quantitive easing this analogy isn’t really true anymore: there is a guaranteed buyer (the ECB) propping up the price of German sovereign debt, so making the yields artificially low.
- qubex 7y ago
  I’ll definitely grant you that quantitative easing complicates the picture, but i it does so in ways far more complicated than you describe: firstly, the ECB buys at secondary-market prices, so the “flight to quality” effect is still there, albeit perhaps in muted form; furthermore, keep in mind that the ECB can and probably will resell those bonds that it does purchase at a later date when it will want to wind down it’s balance-sheet. Other effects also apply. Negative yields however probably do represent a true aversion to risk on behalf of investors, in some capacity or another.

miohtama 7y ago

If you put a lot of money in a bank then there is a counterparty risk the bank defaulting or you getting a haircut. Money in a bank is no longer "yours". Some hardcore asset management schemes store physical US bills in a high security storage. You will pay % negative yield on yearly storage cost, but cash is truly yours and you can withdraw any day. Also in the EU, with some fintech startups, you can now open a bank account which comes with a IBAN number from a central bank of Lithuania - essentially your money is stored within European Central Bank system. You will have negative ECB interest and pay some extra, but there is no counterparty risk unless the whole European banking system collapses.

semi-extrinsic 7y ago
It should be noted that "a lot of money" in this context means more than whatever limit your country has on deposit insurance. In the US, up to $250k is insured by the government against default, and it goes per account type and per bank, so you could easily store, say, $2M fully insured. But of course, this does not insure you against systemic risks. When the financial system in Iceland broke down, depositor insurance meant nothing. Another popular way of storing large amounts of money over long time, is to invest in real estate. Buy apartments in central Paris, London, New York. Very small risk that you lose anything, especially in real terms, if you can keep a cool head about when to sell. Downside is that these are not liquid assets.

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kazinator 7y ago

Suppose you had half a billion dollars or whatever. You could get it in cash. You can't put that under a pillow. You'd need a really secure vault to guard this cash against theft and accidental destruction (fire, flood). In the best case, nothing happens to the money, so it retains its full numeric value, but that vault costs money to rent and operate, and those costs add up to negative yield. That effective negative yield of the vault could be more negative than the negative bond, making the bond more attractive. The negative bond could be more attractive even if it costs more than the vault, because of lower risk.

novaRom 7y ago
How then a bond is different? It is also either a physical thing or a record in DB; both cases require protection and security.
- kazinator 7y ago
  A bond is a registered contract that names specific parties, whereas cash is a manifestation of value associated with whoever bears it. (There are bonds like that; bearer bonds.) Stealing bonds would have to be an information crime; surreptitiously rewriting the identity of the investor on all copies of the contract in existence. Or something like that.

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snowwrestler 7y ago

There are dozens of answers here that explain why institutions buy sovereign debt, in general. What those comments don't explain is why anyone would buy this particular sovereign debt. So: why would anyone buy negative-interest-rate German bonds when U.S. Treasury bonds still have positive interest rates, and are available in much higher volumes?

DubiousPusher 7y ago
Diversification. Spreading your money across many governments which are unlikely to default is better than putting it all in one.
- antaviana 7y ago
  With diversification you decrease the risk of losing everything and increase the risk of losing something.
hendzen 7y ago
https://en.wikipedia.org/wiki/Interest_rate_parity https://en.wikipedia.org/wiki/Interest_rate_parity
- mdemare 7y ago
  Yes. The difference in interest rates implies that the EURUSD exchange rate is expected to rise (slowly) in the coming decades.
camjw 7y ago
Because you’re a European and have to pay your taxes (or your investors, or other people) in euros, so don’t want any exposure to the Euro/Dollar exchange rate.
graedus 7y ago
I think there are laws stating that certain kinds of German institutions must buy German bonds, but I'm not sure.

tryitnow 7y ago

This is an example of how to write a good article, I think the first sentence answers your question: "Germany sold 30-year debt at a negative yield for the first time, as investors desperate for safe assets bet that further falls in yields will boost the value of the bonds in the future." The investors buying these bonds are simply betting that these bonds will increase in value (which will supposedly happen if central banks cut interest rates more in the future). These bonds don't pay out for 30 years and I bet few if any of the institutions buy them intend to hold them that long, they plan to sell when the value of the bonds rise. So why not just park that money in cash? Well let's say you have $1M and you think bond yields will continue to fall. If bond yields fall further, then the value of these bonds increase, then you can sell them and realize a return. However, you also want to think about any way that your cash holdings could increase. Could a dollar (or euro, or whatever currency) tomorrow be worth more than a dollar today? Yes, if there's deflation then it could make sense to just hoard cash under your mattress and realize that it's purchasing power is growing! But these investors are assuming deflation is not too much of a risk - they believe central banks will act to quickly slash interest rates - both increasing the value of these bonds and decreasing the risk of deflation. Markets are pricing in future interest rate cuts, which is probably not a bad bet to make. Markets a probably predicting interest rate cuts because they think various economies are weakening and central banks will cut rates.

nostrademons 7y ago
The implication then is that we're in a bond bubble. When you're buying something that you know has negative fundamental returns on the assumption that someone will buy it from you at a higher price, that's the definition of a bubble. And like many bubbles, it's entirely possible they'll be right in the short term, but it's basically guaranteed that they'll be wrong in the long term. You know exactly what a bond will be worth in 30 years, and with negative interest rates, you know it'll be worth less than now.
- unreal37 7y ago
  Expecting the price of something to rise in the future is not the definition of a bubble. When people were selling houses in Detroit at the bottom of the housing crisis for $1000, the people buying them were expecting the value to rise in the future. It's almost like profiting off of fear not greed.

pfortuny 7y ago

Well, bonds are easier to deal with than cash AND you do not run the risk of binge-spending them. In some sense, bonds “do not burn” whereas your house may, or tour bank account may collapse, etc. The premium is the guarantee.

hsk823 7y ago
Assuming the sovereign debt is actually still good. Countries do default on their debts

lazyguy 7y ago

> I feel like I still don't understand negative yields, despite really trying to. There isn't anything to understand. It's banking lunacy. You only put money into negative yields if you are forced to do it.

rolltiide 7y ago

Your confusion comes from focusing too much on what happens at maturity. This is the least important thing here. Bonds have two ways of providing a return. The yield, and the price of the bond itself. Lower yield means greater price of the bond. They are always inversely correlated. Even lower yield means even greater price of the bond. Because of worldwide policies, Its a bond bull market. The greatest bond bull market of all time and there is no exit. Government creates new bonds at market price. Their independent Central Bank buys those bonds at market price giving newly created money to the government or traders. Market price is always a premium to the prior price. This action devalues the currency, otherwise known as causes inflation, otherwise known as people’s share in the currency stock is diluted. So nobody needs to care about the yield. Nobody is thinking “well golly I’m going to use a few fractions of a dollar for the next 30 years” theyre thinking bonds to the fckin moon Buy high sell higher directly to the central bank. Benign attempts at economic stimulus have turned into a full blown currency war between monetary unions and nation states. The whole point is to get people to think “hm maybe my money isnt doing so well in a bank or in my mattress, maybe I should circulate it in risky investments” , and since people are so willing to pay for the privilege not to do that, the yields will go deeper negative. This prompts other monetary unions to cry foul and consider these actions unfair and uncompetitive, and so they do the same thing to devalue their currency to compete. Any time you hear someone talk about responding to currency manipulators or reacting to the trade war by lowering rates or devaluing their own currency, just remember: Bond. Bull. Market.

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darksaints 7y ago

Could you though? Inflationary and deflationary forces are constantly at work modifying the value of the money you have under your mattress.

cVwEq 7y ago

One way to make money is if you sell the bond at a higher price later to another buyer. From the article: “Why are people buying at negative yields? It is mainly in expectation that you’re going to be able to sell to someone at a higher price later on,” said Andrea Iannelli, investment director, fixed income at Fidelity International. “Whatever the yield you have to assume you’re going to make more on the capital gain than lose on the yield.” So Y < X, but if you bet you can sell at price Z to another buyer later, Z > X and you profit. As an analogy I just thought up: it's kind of like overpaying for a house, thinking that in time the house value will appreciate.

madcaptenor 7y ago
Or just paying for a house, thinking it will appreciate. (The "yield" of a house is negative, because it costs money to keep the thing in the same condition you bought it in, as anyone who owns a house knows.)

dpkingma 7y ago

Held individually the negative-yield bonds don't make much sense. However, they can actually improve the risk-adjusted returns of a portfolio that also holds stocks. This is because long-term bonds have, in the past decade, been negatively correlated with stocks [1,2]. [1] https://imgur.com/a/r9nCsN5 https://imgur.com/a/r9nCsN5 [2] https://www.portfoliovisualizer.com/asset-correlations?s=y&symbols=TLT%2CSPY&timePeriod=1&tradingDays=120&months=36 https://www.portfoliovisualizer.com/asset-correlations?s=y&s...

jpadkins 7y ago

putting cash under your mattress has security costs. For < 1k euro, probably not worth calculating. But for > 1M euro, there is a real security cost to keeping that amount of cash safe for 30 years. I may be totally wrong, but I think the floor on negative yields is going to be the security costs of keeping cash for that timeframe.

gnopgnip 7y ago

A negative rate bond or CD is not fundamentally different from a normal one, you pay a set amount now and in the future you get a guaranteed payout at a future date. Except that instead of making money on the interest, you pay a little. The banks offer these products because they still make money on the fees, and on the arbitrage from loaning out the invested funds at a higher rate(or by doing nothing with a negative rate), or by bundling and selling the securities. This can still be a good option for buyers compared to investing in junk bonds or CDs that pay higher rates, or in stocks and mutual funds because what is important is the risk adjusted return and not just the yield. There are costs/risks associated with keeping a pile of cash in a vault or stuffed in a mattress, or sitting in another type of account that is not insured. If you expect interest rates to decrease even more buying a bond or CD can make money because you can sell it for more in the future, even with a negative rate. The big one is that in certain cases there are requirements to purchase CDs or treasury bonds by law, or as part of a contract, or by the governing docs of a company instead of just holding "cash". For an individual, you would be unlikely to purchase these because the cost/risk of holding cash in a bank account is minimal and some type of insurance likely covers it, and most individuals want higher returns and would rather invest in index or mutual funds than CDs even if they had positive returns. And if you think that interest rates will drop in the future and you can sell the bond for more, you are still more likely to buy higher yield bonds with higher risk.

hogFeast 7y ago

If it makes you feel any better, central banks don't either. Your question is actually fairly straightforward: people own these bonds because they have to. Most countries have regulations that force institutions to own these securities. The more important question is actually: if you are a bank, what do you do now? You have to pay to lend money to people, it costs you 1%/year to just keep the lights on. In Japan, most banks are (again) effectively insolvent. Germany is moving that way...and yes, the "point" of this action (according to central bankers) was to support banks...but it will likely end in most banks in affected countries going out of business. ...but don't worry, the central bankers will produce a brand new plan compose of intricate theories that clearly show how intelligent they are and how this totally wasn't their fault.

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JumpCrisscross 7y ago

> I still don't understand negative yields Safe assets sell a service: they’re a safe place to put your money. For this service, you pay a fee. There are other places to put your money, from cash to money market accounts to listed equities, but they aren’t safe. (They compensate for this unsafeness by promising you a return.)

teambayleaf 7y ago
Why not just putting aside that cash pile? I don't get why you want to exchange it with securities and pay negative yields.

beamatronic 7y ago

It could get stolen from under your mattress. Bugs could eat it. It could catch on fire. You would buy one of these negative bonds as a safer alternative to the risks above. This product may not be for you, but someone would be willing to make this trade.

arcticbull 7y ago

Currency is mildly decoupled from purchasing power. Here's how you look at it. You give me $20K today, and I promise to give you $19K back in 30 years. The question is two-fold. (1) What else would you do with that money, that would offer you a better return, factoring all externalities. Holding cash isn't free once you account for risks like getting robbed holding bills your house burns down, you get fake bills, and potentially-negative interest rates at a bank. If you see the market going down you're not going to put it there either. (2) How much will $20K today dollars buy you as compared to $19K future dollars? If you're betting on deflation, then that $19K future dollars may buy you a house where $20K today dollars may buy you a car.

rags2riches 7y ago
(3) what will the best offer to hold $20K be tomorrow? If it's even worse, I can sell my $19K promise and make a profit! (Falling yields means raising prices.)

nyokodo 7y ago

You can probably write off the losses on your tax filings also. That may play into it.

megaremote 7y ago

> I could just hold on to my money, "keep it under my mattress" and still make a better ROI than bonds with negative yields. Why would anybody buy these bonds? You think you would do that for millions and billions?