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Why would anyone buy a negative yield bond?

October 10, 2019 - 5:36pm

In August, I wrote about negative yield bonds. A bond is a tradable IOU – in which the issuer (typically a government or a big business) promises to repay a specified amount (basically the bond purchase price) at a specified point in the future plus a bit extra – i.e. the interest on the loan, which is also referred to as the coupon or the yield. Bonds, therefore, are a means by which governments and other organisations can borrow from the money markets.

A negative yield bond is a strange beast that promises to repay the holder less than the original purchase price. It is therefore an investment guaranteed to lose you money. Nevertheless, governments have been selling these by the bucket load. At one point over the summer the money markets had $17 trillion invested in these seemingly unattractive pieces of paper.

Why on Earth would anyone want to buy a guaranteed loss?

The purchasers are typically large financial institutions that need to manage vast sums of money. On the principle of don’t-put-all-your-eggs-in-one-basket, capital will be invested in a variety of assets, including bonds. If investors fear that other asset classes like shares or gold might see big losses in value, then a negative yield bond that guarantees no worse than a very limited loss might seem like the safest option – at least for a portion of the investor’s portfolio.

Bonds issued by the most solvent and stable governments with the most buoyant currencies are especially attractive – for instance, countries like Germany or Sweden. That’s why they can get away with offering bonds that offer a (slighty) negative yield.

But here’s the twist: this week Greece managed to sell bonds with a yield of minus 0.02%. The money markets are now paying the Greek Government for the privilege of lending it money.

That might seem like a remarkable turn around for the once crisis-racked country, but it has been purchased at a heavy cost. The perceived safety of newly issued Greek debt is secured against the backing of the Eurozone and the Eurozone’s imposition of permanent austerity on the Greek people.

It also couldn’t be a clearer sign of chronic global shortage of decent investment opportunities.

Peter Franklin is Associate Editor of UnHerd. He was previously a policy advisor and speechwriter on environmental and social issues.


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