Why Would Anyone Buy Negative Interest Rate Bonds?

psst?  Hey I have a great investment idea for you.  Come a little closer and I will tell you in hushed tones…..So, in summary this investment, by design will be worth less in the future than you pay for it today.  Seriously, how much of your hard earned cash are you willing to but into this investment?  I am guessing you are saying a big fat $0.00.

Well guess what?  There are already $13 Trillion (yes with a T) worth of government negative interest rate bonds in existence.  I mean $13 Trillion dollars has already been invested in the investment I was just telling you about.  Why would anyone buy negative rate bonds?  To further confuse you there is expected to be between $15 and $20 Trillion dollars worth of government negative interest rate bonds by the end of 2016.  What madness.  What can we learn from these huge purchases of negative interest rate bonds?

Before I answer that question lets discuss why we even have government negative interest rate bonds.  The central banks are issuing these bond to try to force people out of savings.  In other words make it more profitable to spend your money than to save it.  Also, by lowering financial costs, the central bankers believe they can persuade companies to spend more and inflate the economy.  Well we have been in this environment for  long time, but not much is happening.

Here is an important thing for you to understand; People are more motivated by the fear of loss than the desire for gain.  These government bonds are at least guaranteed to return a large portion of their original principle.  This is probably one reason why people are purchasing negative interest rate bonds.

Another reason why anyone would buy a negative interest rate bond is that it is possible to make money on them.  How? If you buy a 10-year government bond with a negative half of a percent yield and the interest rate decreases to negative one percent, you just made approximately five percent return on that bond.  Astonishing!  Further evidence that customers are way more concerned with loss than they are ever about missing out on gain. With stocks and commodities in such dangerous positions, most people would rather lose a third or a half a percent than 10 or 30 or 50 percent.

Where is there safety?  Where is there sanity?  Keep educating yourself.