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I read that France is selling bonds at Negative Interest Rates, and more recently Germany Started in 2016. I understand why this is beneficial for France, but why in the world would I pay money to let someone hold my money?


Thanks for the update 200_success

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The simple answer: Because you believe every other option can yield greater losses...

So the thinking is; Lend it to France you'll get your money back. Put your money in a bank and there's a chance you won't get it back if the bank goes bust.

Investors also believe that rates will continue to go more negative, in which case they will actually MAKE money. It's a momentum play which will eventually reverse but since the Bond market is extremely liquid, it's a bet that can quickly be unwound.

Another theory floating around is that if the weaker countries of the euro leave (e.g. Greece, etc) and the core keep the euro, then the value of the euro will actually rise. So by putting your money in French or German bonds you would also be securing cash in French or German euro's. - Thinking the unthinkable on a euro break-up - Gavyn Davies

  • This is a good answer in general, but I take reservation against the unqualified "the Bond market is extremely liquid". Tell that to those who bought Greek government bonds a while back and then found the market for those basically freeze up. – a CVn Jul 10 '12 at 8:00
  • @MichaelKjörling the Greek bond market didn't "freeze up" anyone who bought/is buying greek bonds can easily go to the market and sell them... But yes in theory any market can become illiquid. However the question is about French bonds which is far from illiquid. – Kirill Fuchs Jul 10 '12 at 12:42
  • Are banks in France really that weak? And are bank deposits in France not insured? – AxiomaticNexus Apr 27 '15 at 20:51
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    @yasmanillanes it was a general answer with an example for that time period, which was 3 years ago... I wouldn't take any example as current news, in this answer and in SE in general. – Kirill Fuchs Apr 27 '15 at 21:08
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    The FT link is paywalled and I can't read it, but I don't think this answer is correct. As I understand it, negative interest rates are not expressing a lack of confidence in banks. The only reason a negative interest rate is counter-intuitive is that, as the OP suggested, investors "should" just keep their money in cash or in a bank. For large institutional investors, neither option is available: there simply isn't enough cash, and you can't walk into a bank and put a billion EUR in an account. Central banks therefore do have the flexibility to target a negative interest rate. – Mike Haskel Sep 1 '15 at 0:08
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The only reason I can think of would be if you were convinced that you couldn't hold on to your money. Treasury Bonds are often viewed as very safe investments, and often used in some situations where cash isn't appropriate.. Also, they typically have a somewhat patriotic theme, helping your country to grow. In addition, many people don't really pay attention to the rate of the bonds, but are just investing in them. The more people investing in them, the lower the yields become.

But the bottom line is, I would invest in a savings account any day over a negative interest rate... And it looks like I'm in good company as well, a quick study of reports seems to indicate that these are a very bad investment...

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    "Bonds traditionally are viewed as even safer than cash" - that is false. Traditionally bonds are NOT viewed safer then cash. – Kirill Fuchs Jul 9 '12 at 19:44
  • Good point, I've fixed it in my edit. – PearsonArtPhoto Jul 10 '12 at 5:38
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Savings accounts have limitations in case a bank goes belly up and you have a higher amount in the account (more than the insured amount). Mostly big corporations or pension funds cannot rely on a bank to secure their cash but a government bond is secured (with some fine print) and hence they are willing to take negative interest rates.

  • Government bonds are not "secured". Look at what happened in Greece just a few years ago. – a CVn Feb 24 '16 at 8:50
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The average joe wouldn't... we would bury our cash in a mayonaise jar before we would take a guaranteed loss... (although the argument could be made that a positive return that doesnt outpace inflation IS a negative return)... big corporations with billions on hand dont have that luxury however... some investments may also guarantee investors that a certain percentage be allocated to bonds... and in times of deflation a negative return could still provide a net positive return...

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Possibly you could use it as a hedging instrument if it's correlated in some way with another asset you're holding. Even though it seems you're losing money with such a bond, that loss might be less than the hedging costs associated with other instruments.

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The only reason I can think of is that the bonds are bought automatically by some investment pools, groups or institutions. That will stop very quickly once the management finds some other place to put the money.

  • As explained by other, previous answers, there are good reasons why someone might buy a bond at a negative interest rate (which basically all boil down to "better the devil you know"). – a CVn Feb 24 '16 at 8:51

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