I get that people buy long term government bonds, because of how safe it is, and if there would be a recession the government would just print more money and could pay it back.

But why would anyone buy a bond, that yields a negative return? If i would just keep my money in fiat, it would just depreciate in the 10 years, but after the 10 years it would still be more than investing it in a safe negative rate.

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    $\begingroup$ Related: economics.stackexchange.com/questions/10637/… $\endgroup$
    – Henry
    Commented May 22, 2020 at 12:50
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    $\begingroup$ If you have a tremendous amount of money then the bank failing is a legit risk (insurance only covers $250K in US, 85K in UK so really not hard to hit this limit), so is your private cash deposit being stolen or damaged. Among those three options (physical cash, bank account and treasury), government bond is costly but safest. Physical cash storage gets expensive when the volume and threat level goes up, too. $\endgroup$ Commented May 22, 2020 at 16:38

4 Answers 4


Some pictures and text are from Schroders, Marketwatch and other websites, but I don't remember all them.

Of note, Germany first sold negative-yielding bonds in Aug 2019, €2bn worth of 30-year bonds that offer no interest payments at all.

1. Better than holding cash

Cash is obviously most liquid, but some central banks like Japan impose negative interest rates on cash deposits, which trickles to the rate banks charge institutional investors.

Then highly liquid but only slightly negative yielding government bond looks better! Because the UK government unlikely will default, bond buyers are just paying a small sum to the government to guard your money, like in a vault!

2. Wagering that there are other “bagholders.”

Investors who buy negative-yielding bonds are betting on the value of the securities to keep rising. Although investors buying bonds with subzero interest rates are paying for the privilege to hold a bond, they can profit way above their cost if the security’s price rises.

For example, if you expect a central bank to buy more assets, bond buyers can rely on the central bank to hoover up their negative-yielding securities.

In July 2020, an auction for €4 billion euros of 10-year German government bonds TMUBMUSD10Y, 0.644% sold at $-0.26%$, but at a premium price of 102.6 cents to the euro. The benchmark bund is now trading at a price of a 106.9 cents to the euro,. So investors who bought this at auction would've gained around 4% from the price increase alone.

3. Bonds as deflation hedge

When prices fall, most asset classes don't perform well in deflation. An exception are fixed interest government bonds! Because they fixed their coupon and principal, they retain their value and will positive real (inflation-adjusted) return, if inflation $<$ their yield. In other words, a negative yielding bond can positive real return if there is deflation. So you can hedge against deflation with negative-yielding bonds.

4. Currency hedging can transform negative yields into positive yields.

Negative yields don’t mean negative income for some bond buyers. Unlike European and Japanese investors, US investors are often paid to hedge against fluctuations of foreign currencies because U.S. interest rates are much higher than in other developed markets like Europe and Japan. Currency hedging can annualized return 3% for U.S. investors, like American fund managers, buying negative-yielding euro-denominated debt like European government bonds, according to Jens Vanbrabant, senior portfolio manager at Wells Fargo Asset Management.

In Sep 2009, the 10-year German Bund yield at -0.6% looked unattractive to US investors.But currency hedging is priced at the difference between US and German short term interest rates, which can be positive even if a central bank cuts interest rates. Since US short term interest rates are much higher than Germany's, US investors are paid money to hedge euro exposure! With currency hedging, US investors can earn 2.2% when investing in German 10 year bonds (see Figure 2 by Schroders), higher than the 1.6% available on US 10 year Treasuries.

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5. Diversification benefit

What other bolt holes can weather volatile global equity markets, Brexit, US-China trade war?

Traders like volatility to a degree, but they try to diversify the risk so their portfolios aren’t fully exposed to the market's unpredictability. So buying notoriously safe bonds is a risk-averse strategy. You'll lose some money for that safety, but that loss can constitute ‘over-performance’ if other asset classes tumble. When risky assets sell off, negative yields on government bonds may be overshadowed by their proven ability to rally during recessions. Even at negative yields, bonds still are important. Figure 3 by Schroders proves the 3-year rolling correlation between German Bunds and the German DAX stock market index. The two strong negative correlated, if you overlook the period between 2014 and 2017 when the European Central Bank’s (ECB) quantitative easing raised higher bond prices (lower bond yields) and higher stock prices.

enter image description here

Bonds perform well when equities don't, vice-versa. In times of distress, you must reduce risk like this! If you are running for safety, capital leave stocks to government bonds. Even if negative-yielding bonds lower your return compared to normal conditions, they can still reduce portfolio risk.

6. Roll down the yield curve later.

You're assuming the bondholder is holding it long term, but many don't.

In periods of uncertainty, demand for bonds increases, which makes their price increase. So you can profit from buying and selling government debt. If you think this volatility will last, buy bonds now in the hopes that more investors flock to them later. You don't even need fellow investors to buy them! The central banks may be the ones to buy bonds to try to stimulate the economy.

Bond buyers can take advantage of the yield curve’s slope, which still can be steep even for negative-yielding bond markets in Germany and Japan. For example, a trader can buy a negative-yielding 3-year bond and sell it after a year. Since debt prices inversely correlate with yields, all else being equal, the value of the 3-year bond should be higher than, for example, a 2-year bond.

So long as shorter-term bonds' interest rates are more negative than their longer-dated counterparts, the long-term bond's price should rise closer to maturity. But they can profit from this “rolling down the yield curve” as a short-term strategy, and must sell the bond well before maturity, because the bond will trade only at par when it expires.

For example, the Swiss 10-year bond was yielding -0.1% in Jan 2009. But at 22 August 2009, it had returned 5.6%! Negative yields can still positive return! Of course, this works both ways. Any rise in yields can make you lose money.

7. Some institutions are legally required to buy bonds! Liability matching with negative yields

The other reasons are about speculation or managing risk. But institutions can be legally mandated to buy bonds with negative yields.

Certain institutions must follow rules dictated by the banks, pensions funds or insurance companies who provide the bulk of the capital. Those rules mandate the managers to invest just in certain things like investment-grade bonds. Regulators force some clients to buy certain assets, like banks can only buy liquid assets.

Liability-relative investors, such as insurance companies and pension funds, don't care the absolute return or yields from bonds. They often buy bonds to “match” their liabilities. The present value of these liabilities is calculated in many ways, but factors in government bond yields. For example, in Sep 2009 in the euro area, insurance industry used negative rates up to the 11 year maturity point (Source: EOPIA. See data from 31 July 2019). These liability-driven market participants can buy negative-yielding German Bunds to match a future liability . Their values will move in tandem with each other. If they don't buy negative matching assets, they'll be exposed to significant risks if interest rates fell further.

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    $\begingroup$ The question compares buying a bond to "keeping the money in fiat". Point 1 is a good answer to that, but could do with elaboration (what about central banks who don't charge a negative interest rate?). Point 2 is good, but just pushes the question to the next person: why would someone buy it for 106.9c? Points 3-6 are comparing to non-cash investments, so aren't really relevant (sure I can hedge by buying foreign bonds, but why not foreign cash?). Point 7 is good, but again, could they just keep it as cash? $\endgroup$
    – thelem
    Commented May 24, 2020 at 19:32
  • $\begingroup$ Great answer, would just add #8: some institutions have allocations so large that the only market big enough to accommodate them is the US (despite unattractive yields). $\endgroup$ Commented May 25, 2020 at 6:34
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    $\begingroup$ Plagiarised (clearly lightly edited even though not full direct quotes) from schroders.com/en/uk/adviser/insights/markets/… $\endgroup$ Commented Jun 7, 2020 at 11:46
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    $\begingroup$ Also from Marketwatch, structure is the same, text is almost the same. $\endgroup$
    – Giskard
    Commented Jun 7, 2020 at 21:12
  • $\begingroup$ Regarding #4: "hedging" in this example means buying forward euro, which are stronger (appreciated; at a premium) compared to today's euro. $\endgroup$
    – Daniel
    Commented May 7, 2021 at 12:38

There are several reasons why it makes still sense.

  1. Nominal negative return does not mean that real return is negative. There is a difference between nominal interest rates and real interest rates which can be expressed by the Fisher formula:

    $$ i \approx r + \pi$$

Where, $i$ is the nominal interest rate, $r$ is the real interest rate and $\pi$ is inflation. If the nominal interest rate is $-10\%$ but economy is experiencing $20\%$ deflation (that is $\pi = -20\%$) the real interest rate will be $10\%$ which means you are still earning $10\%$ on your investment in real terms. Ultimately what matters for you is the real interest not nominal one because money changes in value due to inflation/deflation and real interest rate accounts for that. If someone promises you interest $5\%$ but inflation over the same period of time is $10\%$ it's still a terrible deal no matter that the nominal interest rate is positive and relatively high because that implies that money looses its value so fast that $5\%$ interest rate is not enough to even break even.

Hence, it is the real interest that matters and negative nominal interest rate does not automatically imply negative real interest rate.

  1. Sometimes real interest rate can become negative as well. In that case people might still chose to make an investment at a real negative interest rate because holding cash is expensive in itself. If you have $\$1,000,000$ you cant simply stuff it under mattress. You would have to buy expensive safe, security, insurance and so on (or failing to do that exposing yourself to risk of loosing them due to accident/robbery). Hence, people will be willing to accept even negative real interest rates as long as the real negative interest rate is not so much negative that it becomes more profitable to just cash out and make it secure yourself.

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    $\begingroup$ 1: In reality the "healthy" economy has an inflation of around 3%. In a recession, (where interest rates can get negative) the economy slows down that is deflationary, but with money printing it's overall inflationary. So while in theory your calculation works, the real interest rate is always lower than nominal, so it still doesn't make sense for a household or anyone to buy negative yielding bonds. 2: I still don't get it why wouldn't it worth more for an individual to keep it as a deposit in a bank. In that way it's liquid, and has a low positive interest on deposit on it, which is better. $\endgroup$ Commented May 21, 2020 at 20:56
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    $\begingroup$ @curiousTrader 1. it is not true that "real interest rate is always lower than nominal". in fact recently in US the estimated real interest rate was higher than nominal one as the picture in link from Mishkin textbook shows. Also, there are some other countries where that happened more often. uploads-cdn.omnicalculator.com/images/real_interest_rate/…. 2. if economy experiences negative interest rate bank deposit interest rate will be most likely negative as well as in NL now for any large sums (ABN amro applies them to deposits above 2,500,000e), $\endgroup$
    – 1muflon1
    Commented May 21, 2020 at 21:14
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    $\begingroup$ I see, it was just hard to imagine it from a household point of view. So with large sums, the interest on gov bond is higher than on bank deposit, even though both of them are negative. Thanks! $\endgroup$ Commented May 21, 2020 at 22:58

Under most circumstances, bonds is the most secured asset deposit method.

  1. Physical cash storage is hard to implement securely. Theft and disaster damage are expensive to guard against. Real estate costs increases linearly with volume.

  2. Bank accounts are much cheaper and could be profitable (positive yield) and safe enough for most people (government insurance covers each person at each bank to $250k in US, 85k pounds in UK). However if you have millions of dollars to deposit (quite easily reached for any business), the risk of bank failing on you starts to show up.

  3. Government bonds could offer stronger backing for the deposit, if said government show strong resilience than any of the banks available. In this case, the depositor may choose to buy government bond even when the yield is low or negative.

The pricing power that the government uses to push negative rates comes from its strong resilience to crisis relative to other institutions. The other extreme is also true: if the government is facing insolvency and its bond carries huge risk, then their yield skyrockets.


The reason nobody else has cited: repo collateral.


"Collateral calls mean in some cases using gold as a last resort (which gets dumped immediately) and in others the buying of pristine collateral at any price. Gold is slammed while T-bill prices skyrocket, their yields plummet. For those unlucky enough to have neither option in front of them, fire sales of assets including stocks and other risk credits...

... Given these market fire sale conditions, obvious signs of gross systemic illiquidity, the Fed’s auctions should be bid full up to the limit each and every one. The demand for liquidity, any spare liquidity, is through the roof curiously everywhere except here.

The answer can only be collateral. In order to bid for the Fed’s bank reserves in any of these FRBNY operations, you have to post some of eligible MBS, agency debt, or UST’s. And when you do, whatever collateral you put up becomes encumbered (which means no repledging)."

A debt instrument, even if negative yielding, can still provide fuel for "rehypothecation", esp. in the off-book, unmeasured by monetary aggregates, shadow banking / eurodollar system.

If you look for "answers" to the repo rate spike in fall 2019


... what you'll almost never hear is the idea that quantitative tightening, or the easing of quantitative easing - which tightened supply in the bond market - might have contributed to overnight repo rates touching 10%. Note that this also impacted the actual IOER, threatening to "uncork" the real overnight interbank rate. This would mean total loss of control by the Fed.

Overnight components overview: https://www.newyorkfed.org/aboutthefed/fedpoint/fed15.html

Typical msm article about the repo blowup: https://www.bloomberg.com/news/articles/2019-09-16/repo-market-chaos-drives-overnight-rate-up-by-most-in-months

Keep in mind, price is inverse to yield. More supply -> lower price -> higher yield. If you look at the yield of the benchmark US 10 year over the last few years, you'll see it climb into autumn '18, which was the first "blip" in the repo market. It made a double top around 3% with its 2014 high, and has been tanking ever since.


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