Why would anyone buy a bond with a negative yield?
In: Economics
Like when t-bills or t-notes are selling above par?
Damn, I have the same question, but am too dumb to understand the reasons provided- at least thus far.
TIL I’m too dumb to understand an ELI5
Why invest in a bond that will lose money, instead of just converting to cash?
Lots of reasons:
1. you’re buying _your own_ bond. Most bonds require a liquidity level in the issuer to match obligation out there, and buy buying back they can decrease the liquidity level required.
2. they may be effectively trading _currency_ – e.g. they currency it’s issue in is going to change in value so the very small loss in bond yield is made up for in currency change (relative to some other currency).
3. They may believe they are entering a period of probably loss in portfolio value but think the most secure place for their money is in a bond that has a very predictable, but reliable loss. E.G. if you believe a market is going to tank by 15%, then finding the strategy that loses 0.5% is _really, really good_.
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Many banks and insurers are required by their regulators to hold high quality bonds. If all of those are negative, you still have to buy them.
For those not forced into it by government action, still if the alternative is to build large vaults to pile up stacks of money and hire people to staff the vaults, and insure it, a slightly negative yield might be better than that.
During WWII “excessive profit” tax were applied to prevent profiteering. Companies bought US Treasury Bill’s, which normally traded at a discount to par, at above par to insure safest investment while avoiding taxes !
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