The greater fool

Who in the world would invest in a negative yielding bond?

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David McLeish, Head of Fixed Income

David McLeish
Head of Fixed Income | Email David »

02 May, 2016

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A negative yielding bond is a very strange thing. It is a bond that if held until its term matures, will return you less money than you paid. The result? A guaranteed loss. Now who in the world would make such an investment?

Funnily enough, a number of notable asset managers have recently been quoted saying they've been buying negative yielding bonds, and those who choose not to are the foolish ones. Make no mistake, these are not the (poor) investors who simply have to own these assets, like central banks who must hold such bonds as part of their foreign exchange reserves; or banks who need them to meet their liquidity requirements. These are asset managers who have a wide choice of investments to hold, the majority of which do not have negative yields.

There are a range of reasons, these managers say, as to why they expect to profit from such investments. But in essence they all rely on one thing — finding a greater fool who will buy their bonds from them at a higher price. We all know investing is about buying low and selling higher. But you really have to question an investment strategy that is based on buying an asset with a guaranteed negative return, in the hope that someone else is going to come along and accept an even more negative return from it.

These managers may be hoping that central banks will keep pushing interest rates further below zero. Or they may expect that everything else is going to be more negative (the sky falling scenario) so a little negative is a good trade. Hmmm.

Bloomberg now estimates that over 30% of all government bonds on the planet (more than $10 trillion in all) are trading with a negative yield. With this number growing by the day, you have to wonder just how many fools these asset managers think are out there.

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