Investments With Negative Yield

  morddwyd 07:59 10 Jan 12
Locked

It appears that Germany is doing a roaring trade in selling bonds with a negative yield.

http://www.bbc.co.uk/news/business-16470494

Could somebody who knows a bit more about economics than I do explain this simply please?

Not being sarcastic or funny, genuine enquiry and request for knowledge, I just don't understand it.

  Toneman 09:42 10 Jan 12

Don't we all have them, very few investments keep on top of inflation...most lose a per cent or more per year...

  bjh 09:48 10 Jan 12

It's a reflection on the uncertainty of the Eurozone future as a whole. If you have to invest a few billion for the next year or so (and don't we all face this dilemma from time to time?), a small but certain loss seems a good bet at the moment.

Unlike inter-bank lending, this money is secure. That seems like a good option at the moment, so it's as if the lender is paying a small premium for the secure storage of funds for the period of the bond. Rent-a-safe, as it were!

As the money is secure, and recognised as such, the banks can use the capital as a security on other deals, and there they hope to make money!

  Wilham 11:00 10 Jan 12

Like morddwyd I was surprised with 'negative equity'. Then I spotted the cost was half -0.0122% which is less than one euro in every ten thousand (six-month bond). Also it is issued by European Central Bank, linking security to the whole Eurozone, not just Greek saddled Germany.

bjh has it in a nutshell,... "Rent-a-safe"

  bjh 11:16 10 Jan 12

By the way, I'd invest in "Greek-saddled-Germany" like a shot, if the alternative was "the Eurozone"...

Without German money, the Eurozone is a busted flush - and I speak as a confirmed Europhile.

  Aitchbee 13:28 10 Jan 12

Most of my cash investments down at the local bookies result in a positive loss.

  Forum Editor 18:58 10 Jan 12

"Could somebody who knows a bit more about economics than I do explain this simply please?"

Imagine yourself a Frenchman with say, 20 million Euros to invest (A nice round sum).

You look around, and see this stock falling, that bond's value sliding, and stories of doom and gloom on almost every news broadcast. Your money is in the bank, but you have heard rumours that some major banks may not be in such good shape any more. Not to put too fine a point on it, you are feeling decidedly dodgy in the confidence department; like lots of rich investors you jump a mile in the air when you hear a car backfire.

Where to tuck those Euros so they'll be safe from the storm you're sure is still to come? Along comes Germany with its six-month treasury bills. They yield a negative return, admittedly, but in six months time you'll get almost all your money back - a guarantee that's about as cast iron as they come in today's uncertain world.

The chances of the German treasury defaulting on its own bills is negligible, you can buy yourself some breathing space while you sit and watch the world go by. In six months time - or a year - things may pick up,and you can carry on getting richer by reinvesting those Euros elsewhere.

Believe it or not, that's the explanation.

  morddwyd 19:38 10 Jan 12

FE

I do believe it. Thanks very much, and to all who answered.

  Wilham 20:41 10 Jan 12

FE On a technical point, and I may be wrong, I believe the six-month bonds are issued by the European Central Bank which is part of the EU administration. The official Bundersbank is part of the German Federal Government, and acts as as an agent to arrange the auctions of these ECB bonds. It means the security of the bonds is spread across the Eurozone, and there is argument that the UK also is brought in by EU rules, - disputed of course.

Shoot me down if above is in error.

.

  Forum Editor 23:06 10 Jan 12

Wilham

These are Federal bonds, and are issued by the German government. They have been issued every three months since 1997, and have a six month maturity. That means that at all times there are two issues outstanding.

The Bundesbank is, as you say, part of the German Federal government.

  wee eddie 01:35 11 Jan 12

Nice thing about Negative Interest is that you can charge it against Taxable Income

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