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I see presently that many countries outside the U.S. have negative rate government bonds. So you buy one for $101 and in 5 years you get $100 back (face value). (I picked numbers for simplicity).

I understand the bond would be more difficult for someone to steal and cash; but that does not seem a large value. If you just hold cash you can use it at anytime. There is no inflation protection.

What am I missing?

marked as duplicate by Chris W. Rea, D Stanley, Dheer, JoeTaxpayer investing Aug 12 at 9:40

This question has been asked before and already has an answer. If those answers do not fully address your question, please ask a new question.

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If we exclude speculation about future value, there's one rather simple reason to buy such a bond:

If you're looking for a safe way to store a lot of money, this is in fact the cheapest option.

Let's assume you're a bank with a lot of money that your customers gave you. This money must be stored somewhere. Of course you can lend it to other customers charging an interest rate which is basically how banks earn (a part of their) money. However, there's always a risk associated with that so that's not an option for all the money you get. Remember, it's not your money and there're laws on what you can and can't do with it!

Next thing you could do is deposit any leftover money at the European Central Bank. There's no risk, but the ECB will take a fee of I think 0.4% p.a. at the moment, which is quite a lot.

You may think of storing all that money in cash, but I think it's rather obvious that handling and storing millions or even billions in cash will cost something.

Finally, you may lend your money to a country like Germany which is considered quite safe, too, but only costs about 0.1% p.a.

  • There are also certain types of investors who are legally restricted to few investments that are considered safe, and these government bonds are in the allowed class (e.g. trustees, IIRC also certain types of insurance money) – cbeleites Aug 9 at 20:54
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Why would one buy a bond with a negative rate?

Buying a bond with a negative redemption yield can be profitable in real terms in a period deflation. If deflation sends prices down by 4% and you receive back 99% of your money, then in "real terms" you are up (about) 3%.

Compare this to buying a bond with a positive redemption yield, buy whose yield is insufficient to account for inflation. Here, upon redemption, you will have lost money in "real terms".

So it would make sense to buy bonds with negative redemption yields if you anticipate an extended period of deflation.

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    This doesn't make sense by itself because even in a period of deflation, you'd be better off just doing nothing. The bond would have to provide something else of value for it to make sense. – LunarGuardian Aug 9 at 18:52
  • @LunarGuardian In a period of deflation, economic conditions are dire and banks in particular suffer enormously. The risk of bank failures means that most institutions will prefer the zero-risk rating that government bonds offer, even if it means paying a fee via negative yield. Individuals may choose to leave their money in cash. However, the question being asked by the OP is why would people buy negative yielding bonds, not what is the best way to handle the situation. – Nick R Aug 9 at 23:05
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Because you expect to sell the bond at $102 as soon as possible

who cares about what happens in 5 years

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    Which raises the obvious question of why would the next person buy at $102? Because they can sell to someone at $103? Can't go on for ever... – AakashM Aug 9 at 7:59
  • @AakashM is that an obvious question? Someone is going to lose, if you are in the markets and havent accepted greater fool theory then get out of the markets. – CQM Aug 9 at 8:24
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    Yes, it's an obvious question. It requires understanding why someone would buy a negative-yield bond even without the possibility of flipping it for more, though. If yields drop even further, you can sell your bond for a premium as long as that premium is less than the loss associated with the current yield. For example, if rates drop further and now a new buyer can only get $99 in return for a $101 investment, your bond is a better option. You can sell it for $101.50, earning you a profit and limiting the buyer's loss to $1.50 rather than $2. – chepner Aug 9 at 17:54
  • See @Thomas's answer for why someone would feel compelled to choose between your bond and a new bond, rather than holding money in the first place. In some sense, this is similar to shorting a stock; you buy a bond now because you think the yield will drop further in the future, just like you short a stock if you think its price will drop later. – chepner Aug 9 at 17:57
  • @chepner these answers neglect WHY and HOW interest rates are going negative. When you understand that Central Banks with infinite money worldwide are the primary buyers of these negative bonds, pushing the yields further negative, and this monetary policy is not changing, the answer is very easy "because you expect to sell the bond at a greater premium [probably to the central bank]". Buying bonds is the primary way they get new money into the economy. They will hold loss making bonds on their balance sheet till maturity, or crash the market selling them. There are no natural markets here. – CQM Aug 13 at 15:00

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