Negative Yields

Negative yields are a bizarre financial phenomenon where a lender pays a borrower for the privilege of lending them money. Imagine putting $1,000 in a savings account and getting back only $995 a year later—that’s the essence of a negative yield. This typically occurs with high-quality government bonds issued by stable countries like Germany, Switzerland, or Japan. Instead of receiving interest payments (the 'yield'), the investor who buys the bond and holds it to maturity is guaranteed to get back less than they originally paid. This turns the fundamental logic of investing—earning a return on your capital—completely on its head. While it sounds absurd, the rise of negative-yielding debt in the 2010s was a major sign of global economic anxiety and the extraordinary measures taken by central banks to stimulate their economies. For the average investor, it serves as a stark reminder of how strange and distorted markets can become.

This is the million-dollar question. Paying someone to take your money seems like a terrible deal, but there are a few (mostly institutional) reasons why someone might do it.

During periods of extreme economic turmoil or the threat of deflation (where prices fall and cash becomes more valuable), the primary goal for some investors shifts from generating returns to preserving capital.

• Fear is the Key: When investors fear losing 20% in the stock market, a guaranteed small loss of, say, 0.5% on a German government bond can suddenly look attractive. It's seen as paying a small fee for the safety and certainty of getting most of your money back.
• Hoping for a “Greater Fool”: Some buyers aren't planning to hold the bond to maturity. They speculate that yields will fall even further into negative territory. If they buy a bond with a -0.5% yield and its price rises so that the yield becomes -0.7%, they can sell it for a capital gain to another buyer—the so-called “greater fool.”

A negative yield might be an acceptable cost for investors who believe the bond's currency will rise. For example, an American investor might buy a negative-yielding Swiss bond if they expect the Swiss Franc to appreciate significantly against the US Dollar. The profit from the currency exchange could easily wipe out the small loss from the negative yield, resulting in an overall profit. It’s less of a bond investment and more of a currency bet with a bond attached.

This is one of the biggest drivers. Many large institutions simply don't have a choice.

• Regulatory Mandates: Institutions like pension funds, insurance companies, and commercial banks are often legally required to hold a certain percentage of their assets in ultra-safe government bonds, regardless of the yield. They are “price-insensitive” buyers who must purchase these assets to comply with regulations.
• Central Bank Policies: When central banks like the European Central Bank or the Bank of Japan engage in massive quantitative easing (QE) programs, they buy up huge quantities of government bonds, pushing prices up and yields down, often deep into negative territory.

For a practitioner of value investing, the concept of negative yields is financial heresy. The entire philosophy, pioneered by Benjamin Graham, is built on purchasing assets for less than their intrinsic value to create a margin of safety and generate a positive return. A negative-yielding bond offers the exact opposite: a “margin of loss.” You are paying more than the sum of all future cash flows you will receive, guaranteeing a loss if you hold the bond until it matures. As Warren Buffett has noted, it's a very strange world where you go to the bank and pay them to hold your money. For the ordinary, long-term investor, these instruments make no sense as an investment. They are either tools for short-term speculation on interest rate or currency movements or a costly form of “mattress money” for massive institutions. The existence of trillions of dollars in negative-yielding debt should be seen as a flashing red light, signaling a deeply unnatural and distorted financial environment.