Show pageOld revisionsBacklinksBack to top This page is read only. You can view the source, but not change it. Ask your administrator if you think this is wrong. ====== Negative Yield ====== Negative Yield is an investment concept that sounds like a joke from a parallel universe, but it's very real. In simple terms, it means you are **paying** a borrower to take your money. Imagine lending a friend €100 and agreeing to get only €99 back next year. That's a negative yield in action. This bizarre situation most commonly occurs with [[bond]]s, particularly high-quality [[government bond]]s. When you buy a bond with a negative [[yield]], the total return you receive if you hold it until its [[maturity]] date will be less than your initial investment, or [[principal]]. It turns the fundamental logic of investing—earning a return on your capital—completely on its head. This isn't just about your returns failing to keep pace with [[inflation]] (which would be a negative [[Real Yield]]); this is a guaranteed **nominal loss**. You end up with fewer dollars or euros than you started with, even before considering the eroding effect of inflation. It's a phenomenon that forces investors to question the very definition of a 'safe' asset. ===== How on Earth Does This Happen? ===== A world with negative yields isn't natural; it's engineered. There are a few key reasons why an investor would ever accept a guaranteed loss. ==== Central Bank Intervention ==== The primary driver is aggressive monetary policy from a [[Central Bank]]. In an effort to stimulate a struggling economy, central banks like the [[European Central Bank (ECB)]] and the [[Bank of Japan (BOJ)]] have implemented policies such as [[Quantitative Easing (QE)]]. They buy massive quantities of government bonds, which drives up their prices. Since bond prices and yields move in opposite directions, this intense buying pressure can push yields down below zero. This is done to encourage banks to lend money and businesses to invest rather than hoard cash. ==== A Flight to Safety ==== During times of extreme economic fear and volatility, large institutional investors prioritize capital preservation above all else. They might be so terrified of losing 30% in the stock market that losing a guaranteed 0.5% on a German or Swiss government bond seems like a good deal. These bonds are seen as the ultimate [[safe-haven asset]]. In this context, the negative yield is viewed as a fee for secure storage—like paying for the world's most secure parking spot for your cash. ==== Expectations of Deflation ==== [[Deflation]] is a period when prices are falling, meaning your money becomes more valuable over time. If an investor expects deflation of, say, 2% per year, then a bond with a negative yield of -0.5% would still produce a //positive real return// of 1.5%. You get back fewer euros, but those euros can buy more goods and services than when you started. ===== A Value Investor's Take on Negative Yields ===== For a value investor, the concept of negative yields is financial nonsense. It violates the most fundamental principles of investing. As [[Warren Buffett]] has noted, it's an "unbelievable" situation to be in. Buying a negative-yield bond is a surefire way to break his first two rules of investing: "Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1." Here’s how a value investor views the situation: * **No [[Margin of Safety]]:** The cornerstone of value investing is buying an asset for significantly less than your estimate of its intrinsic value. A negative-yield bond is the polar opposite. You are knowingly paying //more// than the sum of all future cash flows you will receive. You are paying €1,005 for a piece of paper that only promises to pay you back €1,000. There is no margin of safety, only a guaranteed margin of loss. * **Investing vs. Speculating:** Value investors seek to become owners of productive assets—businesses that generate profits and cash flows. Paying to lend your money to a government is not an investment in a productive asset. At best, it's a speculative bet on interest rates falling even further (allowing you to sell the bond to a "greater fool" for an even higher price) or a bet on severe deflation. * **Rationality Over Fear:** While others flee to negative-yield bonds out of fear, the value investor remains rational. They understand that the goal is to increase purchasing power over time. Locking in a nominal loss is an irrational act unless you have an extremely high conviction of prolonged, severe deflation—a rare and destructive economic condition. In short, a value investor would steer clear of negative-yield bonds and continue their patient search for wonderful companies at reasonable prices, leaving the world of upside-down returns to central bankers and speculators.