Negative Yields on Bonds

Does somebody want to explain this to me. I was reading that some bonds in Europe have negative yields. Why would anybody ever pay interest to hold a bond?


Not enough mattresses to stuff cash in.

This. There is a real cost to holding physical cash (security, a vault, the risk adjusted cost of it being stolen). Some banks and countries have negative deposit rates (Switzerland for example). So the bond may just be less negative than the savings account. Now I’d expect any negative yield bond to be incredibly short term and of very high credit quality, probably sovereign). But if deposit rates increasingly go negative, perhaps a term and credit structure to negative rates may emerge, which would be frightening on so many levels. Reality today is that its costly to save and cheap to spend. This is our society

yes. deposit rates at the ECB are -0.2%. many countries have negative rates. if you think that the Bundesbank and the ECB are of similar credit quality, then you’d be willing to buy negative rate ST bonds or deposit your cash at a loss with the Bundesbank over the ECB. some of the pressure on yields might be due to worry about confiscation in your home country. as we saw in Cyprus, bank accounts were raided and used as part of the bailout. this was a warning to all Europeans that safety is of the utmost importance and to many individuals investing in German bonds at -0.1% will always be better than investing in a Spanish, Greek, Italian, Portuguese or French bank account at 0.5%-2%.

Some insitutional investors (insurance companies, pension funds) don’t really have another choice than investing in these bonds as a result of regulation. Moreover, they need to hold liquid investments to pay out money to their clients. Additionally, they hold positions in these to get diversification benefits.

It’s regulation to hold them tied to trying to increase lending through the central banks action.

So it’s looking like the entire German curve is flattening to -0.2%

techically the paper money in a bank vault belongs to the central bank. the central bank actually pay the commercial bank for taking care with it. i.e. if you take a suitcase full of cash to the bank, it goes into the vault and the central bank account is credited.

the central bank can then pay interest electronically to the commercial bank, and of course it forms the reserve requirement.

…so it’s quite easy to impose a negative rate from the central bank’s perspective.

the obvious follow on question is why doesn’t the commercial bank just keep the paper money and not credit it back to the central bank. - probably the easiest answer is that they are not allowed to do this. second answer is it’s a lot of risk, expensive, doesn’t allow lending etc…

alternatives such as nestle bonds are a better choice for -ve rate avoidance.

i agree with the two peepz. european bond market is retarded. in addition to what is mentioned below some ppl are actually buying it, because the central bank is conducting QE and will overpay for whatever they buy. so ppl are essentially speculating. what should really happen. is ppl sell the euro, and buy the USD or another higher yielding investment. EURO should CRASH. their exports should go up. and their economy should improve.

Yeah the Bunds have negative yields until somewhere between 5 and 10 Y, the latter of which is around 20 Bips.

Today a client of mine made a drawdown on its facility. I had a brain fart stearing at the fixing and initially thought it was a mistake, but EURIBOR 3M is at 2 Bips. WTF.

On another note something I noticed but that nobody seems to talk about is the widening of the Swap Spread (on Bunds). From around 20-25 Bips 2 months ago to like 40 Bips now. Interesting and something to monitor IMO, as my perception of the perception of risk doesn’t point to a worsening of conditions.