The idea that you can make a case for negative-yielding debt would seem to be counterintuitive at best and irrational at worst. Never-the-less, there are some rational reasons for an investment decision that seems to defy logic.
Perhaps the primary value of negative-yielding debt is safety. The typical investor might conclude that a federally insured bank deposit would be a better way to go. True enough if the amount can be fit into one or, at most a few bank accounts, staying within the $250,000 per account limit. But what do you do if you’re talking about hundreds of millions? Bonds, with a miniscule risk of default, can provide security, regardless of yield, for virtually unlimited amounts at a very low cost.
Then there is the issue of currency fluctuations. For example, a purchase of German bunds, when the Euro was trading at approximately $1.10 U.S., would reflect a tidy profit now that the Euro is trading at approximately $1.17 U.S.
Don’t forget the issue of security. During the 2008-09 financial crisis, debt issued by the U.S. was described as the “cleanest dirty shirt” (thank you Johnny Cash), meaning that the U.S. may not have been in great shape, but everyone else was worse.
Investors should consider that short-term interest rates tend to reflect central bank actions, while long- term rates are more a function of market forces. It might be helpful to recognize that institutions and very wealthy individuals, are less interested in getting rich(er) and more interested in preserving capital and/or staying rich.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA