Another day, another bizarre financial-market milestone.
On Wednesday, Germany became the first member the eurozone to sell 10-year government bonds at a negative yield—which is to say, investors paid for privilege of lending Berlin money for an entire decade. If someone were to purchase and hold these bonds to maturity, they would get back less cash than they originally invested.
This is not how bond markets work when all is well and fine in the world. In sane times, lenders are supposed to get paid. But government bond yields have been plummeting all around the globe this year, as nervous investors have looked for relatively safe places to put their money in what feels like an uncertain economic moment (when bond prices rise, the interest they pay stays the same, so their yields fall). Citi recently reported that about one third of all developed nation debt is offering negative yields. Amazingly, yields on Switzerland’s 50-year bonds recently fell below zero. The key point about Wednesday’s news is that Germany auctioned off this debt off itself. Most data we see on bond yields reflect the price on the secondary market—they’re for old debt that investors buy and sell between one another. This time, the German government is borrowing itself, and for nothing.
Germany is not the first country to pull off this particular party trick. Switzerland sold negative-yielding 10-year bonds in 2015. Japan also did it this year. Meanwhile, Germany and other European countries have previously sold off shorter-term debt at negative yields.
There are a number of different reasons why bond investors might stoop to paying countries in order to lend to them (and you can listen to Felix Salmon, Cathy O’Neil, and I argue about them on the latest edition of Slate Money). For one, prices could go up further, in which case people could sell their bonds at a profit—negative yield or not. Meanwhile, central banks are offering negative rates on deposits by financial institutions, and storing physical cash can be expensive, so buying a negative-yield bond might still be a relatively convenient and efficient way to keep your assets liquid. Also, a lot of investment funds are required by their rules to hold a certain percentage of bonds in their portfolios, so they don’t have much choice but to grin and bear crappy yields.
But fundamentally, it really seems like investors are piling into government bonds and driving up their prices because the world seems really, really shaky right now, and it’s hard to find other comparatively safe assets that at least offer limited losses. Meanwhile, the fact that bonds maturing in 10 years or more have negative yields is almost surely a sign that investors believe the risk of inflation down the line is low, which in turn probably means they don’t expect the world economy to suddenly go on a tear. What we saw in Germany Wednesday is basically a big vote of no confidence. Sigh.