Why would I buy a bond with a negative yield?

Question

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.

Answer 1

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.

Answer 2

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.

Answer 3

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.