So investors are willing to miss out on annual interest payments to hold German paper, considered Europe’s safest asset. The auction finished with a negative yield of –0.26%, meaning that buyers would lock in a small loss if they held the paper until maturity. This is the second time that Germany has managed to issue such zero-coupon debt.
Worldwide, more than £10trn-worth of government and some corporate bonds are now trading on a negative yield. The phenomenon is underpinned by quantitative-easing policies from central banks that have seen them buy up trillions of dollars of debt, regardless of the price.
The US Federal Reserve, for instance, owns $2.1trn in Treasury bonds. The mania for bonds means that more than a dozen supposedly high-risk corporate junk bonds are trading in Europe on a negative yield, notes Paul Davies in The Wall Street Journal. “Ultra-loose monetary policies have turned debt investing into a choice about how to lose the least amount of money.”
Many will still be hoping for a profit, of course. The German ten-year bond, for example, has traded on yields as low as –0.40% this month. Those who bought the asset on a negative yield may still realise a capital gain so long as they can sell it on at a higher price to a “greater fool” willing to take on an even worse rate of return.
Investors are betting that central-bank activism has abolished risk, says Robert Burgess on Bloomberg. Yields on two-year Italian debt fell below 0% this month. This in a country “on the verge of fiscal crisis” barely a month ago. “Logic has been suspended.”