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The only reason that I can think of is because I expect the bond to appreciate in price thus offsetting the loss in yield. I could still end up with less money than I started with, if I hold the bond until maturity. Ultimately, the only scenario where I would want to buy a bond with a negative yield is because I anticipate deflation and even lower rates in the future. Is this correct, or is there another reason?

Currently, a lot of the global government bond market is trading on negative yield, and there are even some corporate bonds that are too.

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    Note that if you anticipate deflation, it would be better to hold cash than a negative nominal yield bond. Holding a fixed negative nominal yield bond is like paying a bank for the convenience of them holding onto your cash as opposed to you putting it under your mattress. Could be reasonable in some cases. – farnsy Feb 18 '16 at 5:03
  • money.stackexchange.com/questions/111996/… – Raj Sep 5 '19 at 13:34
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Possible reasons I can think of:

  1. You are a central bank. Your goal is to inject liquidity into the system by buying bonds, and you don't care about low or even negative returns. Your bond buying program drives yields lower by design.

  2. You are a bank who wants to safely park some money, but you are discouraged from depositing more than your reserve requirements into your central bank account by its negative interest rate (e.g. the -0.40% deposit rate by the ECB). You will then prefer to convert the cash into safe government bonds at less negative interest rates.

  3. You want to safely park some money (more than covered by deposit guarantee schemes), yet you see a significant risk of a deflationary bust: some banks may fail, and your deposits could disappear. By buying negative yielding bonds, you are essentially paying to eliminate this particular risk.

  4. You are a speculator betting that other bond buyers (with the previous reasons, or other speculators) will drive yields even lower, giving you capital gains when you sell your bonds on the secondary market.

  5. You are a broker with customers who are interested in shorting certain bonds. These customers borrow the bonds from you and sell them, hoping to buy them back at a lower price. You charge an interest rate on the borrowed bonds that offsets their negative yield, allowing you to still earn a profit.

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It would be preferable to purchase a bond with a negative yield if the negative yield was the smallest compared to similar financial securities.

The purchase or sale of a security is rarely a mutually exclusive event. An individual may have personal reasons or a desire to contribute to the activity the bond is financing. To an entity, the negative yield bond may be part of a cost averaging plan, diversification strategy, a single leg of a multi-leg transaction, or possibly to aid certainty as a hedge in a pairs trade. And of course there may be other unique situations specific to the entity.

Said another way, is the Queen of Spades a good card? It depends on the game being played and what is in your hand.

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Perhaps something else comes with the bond so it is a convertible security. Buffett's Negative-Interest Issues Sell Well from 2002 would be an example from more than a decade ago:

Warren E. Buffett's new negative-interest bonds sold rapidly yesterday, even after the size of the offering was increased to $400 million from $250 million, with a possible offering of another $100 million to cover overallotments.

The new Berkshire Hathaway securities, which were underwritten by Goldman, Sachs at the suggestion of Mr. Buffett, Berkshire's chairman and chief executive, pay 3 percent annual interest. But they are coupled with five-year warrants to buy Berkshire stock at $89,585, a 15 percent premium to Berkshire's stock price Tuesday of $77,900. To maintain the warrant, an investor is required to pay 3.75 percent each year. That provides a net negative rate of 0.75 percent.

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The question in my view is going into Opinion and economics.

Why would I buy a bond with a negative yield?

I guess you have answered yourself;

  • expect the bond to appreciate in price thus offsetting the loss in yield
  • because I anticipate deflation and even lower rates in the future

Although the second point is more relevant for high net worth individual or large financial institutions / Governments where preserving cash is an important consideration.

Currently quite a few Govt Bonds are in negative as most Govt want to encourage spending in an effort to revive economy.

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    Saying the bond appreciates in price is the same as saying the yield becomes even more negative, isn't it? – DJohnM Feb 16 '16 at 8:15
  • @DJohnM Only if you buy more of them at the higher price, right? Take a fictious example. You pay $10,050 to get $10,000 back at maturity; that gives you a -0.5% total return. Now, after you buy, the bond appreciates to $10,100. Someone buying at that price obviously gets a -1.0% total return because they pay $10,100 to get $10,000 back, but your return on investment (assuming you keep the bond to maturity) remains -0.5% because you still paid $10,050 to get $10,000 back. The current price of a bond is only relevant if you buy or sell (including issuing more) before maturity. – user Feb 17 '16 at 9:25

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