Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 104

Why investors buy bonds at negative yields

Numerous European countries now have short, medium and even long term government bonds issued in local currencies (including Euros) offering investors negative yields, such as Germany, Switzerland, France, Denmark, Netherlands, Sweden, and even Ireland and Portugal! Why would anyone invest when they receive less back on maturity than the original investment? It’s not for the interest payments – most offer interest coupons of only a fraction of a per cent.

The chart shows yields on 10 year government bonds rising during the 2010-12 ‘PIIGS’ crisis and then declining as Europe slowed into deflation prompting the start of Eurozone ‘quantitative easing’. The PIIGS countries of Spain, Italy and Portugal have experienced dramatic reductions in their borrowing costs. Bond yields fell again in March 2015 in most markets, with the main exceptions being Greece where yields rose as it lurches toward its third bailout or possible Euro exit, and Japan, where yields also rose a little with its money printing efforts and exit from recession.

European investors are either predicting decades of price deflation ahead, so a buyer could make a positive real return (after negative inflation), as Europe entered deflation late last year. Or they are simply terrified of putting their money anywhere else. They prefer buying loss-making bonds instead of just hiding their money ‘under the bed’ or in a safe at home or in a deposit box at their local bank branch, where they would at least get their money back intact. They seem to prefer the certainty of losing money invested in government debt rather than the remote risk of theft if their homes, banks or countries are invaded and plundered. Switzerland makes sense as a safe haven for Europeans, but Germany? Germans tried to conquer Europe by military force three times in the past 150 years!

With yields so low, investors are accepting longer and longer terms in the search for yield, fuelling a boom in multi-decade sovereign and corporate debt. On 10 March 2015 the UK government issued 53 year bonds at an incredibly low 2.62% yield as the UK enters deflation.

It is correct that most government bonds in the world (including Australia) are trading at a premium to par so investors who buy them now are guaranteed to make a capital loss. And that's if the government pays which it probably will, although Australia has defaulted in the past. And that's before inflation. If inflation rises from zero or negative at the moment back to rising a couple of percent, those long term bonds could drop by 20-30% in value.

There is a way out of losing money, of course. When a PIIGS country exits the Euro, its own currency is likely to plummet. If there is a ‘Grexit’, the Greek Drachma will probably drop 30-50%, so Greek investors in Euros will make handsome returns, even if they initially invest at negative yields. The low yields are a bet against the Euro holding together.

That's if the Germans give them their Euros back at maturity. In the meantime, European bonds and shares are generating outstanding returns in the short term under ‘QE Europe’ as yields fall, the Euro falls and share prices surge.

 

Ashley Owen is Joint CEO of Philo Capital Advisers and a director and adviser to the Third Link Growth Fund. This article is educational only. It is not personal financial advice and does not consider the circumstances of any individual.

 

RELATED ARTICLES

Are bond yields lower forever or is the Big Bang coming?

Briefly, on the role of government bonds

A journey through the life of a fixed rate bond

banner

Most viewed in recent weeks

16 ASX stocks to buy and hold forever, updated

This time last year, I highlighted 16 ASX stocks that investors could own indefinitely. One year on, I look at whether there should be any changes to the list of stocks as well as which companies are worth buying now. 

2025-26 super thresholds – key changes and implications

The ABS recently released figures which are used to determine key superannuation rates and thresholds that will apply from 1 July 2025. This outlines the rates and thresholds that are changing and those that aren’t.  

Is Gen X ready for retirement?

With the arrival of the new year, the first members of ‘Generation X’ turned 60, marking the start of the MTV generation’s collective journey towards retirement. Are Gen Xers and our retirement system ready for the transition?

Why the $5.4 trillion wealth transfer is a generational tragedy

The intergenerational wealth transfer, largely driven by a housing boom, exacerbates economic inequality, stifles productivity, and impedes social mobility. Solutions lie in addressing the housing problem, not taxing wealth.

What Warren Buffett isn’t saying speaks volumes

Warren Buffett's annual shareholder letter has been fixture for avid investors for decades. In his latest letter, Buffett is reticent on many key topics, but his actions rather than words are sending clear signals to investors.

The 2025 Australian Federal election – implications for investors

With an election due by 17 May, we are effectively in campaign mode with the Government announcing numerous spending promises since January and the Coalition often matching them. Here's what the election means for investors.

Latest Updates

World's largest asset manager wants to revolutionise your portfolio

Larry Fink is one of the smartest people in the finance industry. In his latest shareholder letter, the Blackrock CEO outlines his quest to become the biggest player in private assets and upend investor portfolios.

Economy

Australia's economic report card heading into the polls

Our economy grew by a nominal rate of 7% per annum from 2017 to 2024, but it benefited from the largesse of fiscal and monetary policies, both of which are now fading. We need a new, credible economic growth agenda.

Preference votes matter

If the recent polls are anything to go by, we are headed for a hung parliament at the upcoming federal election. So more than ever, Australians need to give serious consideration to their preference votes.

SMSF strategies

Meg on SMSFs: Tips for the last member standing

It’s common for people as they age to seek more help in running their SMSF if their capacity declines. An alternate director may be a great solution for someone just planning for short-term help in the meantime.

Wilson Asset Management on markets and its new income fund

In this interview, Matthew Haupt from Wilson Asset Management discusses his outloook for the ASX, sectors such as REITs that he likes, and his firm's launch of a new income-oriented listed investment company.  

Planning

‘Life expectancy’ – and why I don’t like the expression

Life expectancy isn't just a number - it's a concept that changes with survival rates over time. This article breaks down how age, survival, and societal factors shape our understanding of life expectancy, especially post-Covid. 

The shine is back on gold, and gold miners

Gold mining stocks outperformed in 2024 and are expected to do well in 2025. At this point in the rally, it's worth considering what has driven gold prices higher and why miners could still have some catching up to do.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.