The German government issued 10-year bonds with a negative yield for the first time Wednesday, following similar auctions in Japan and Switzerland.
“By the end of the time the bond matures, you get back less than you paid for it,” said Kathy Jones is chief fixed-income strategist at Charles Schwab.
Under more normal circumstances, investors might buy a bond for a set price – say $1,000. “It pays a certain amount of income, usually every six months,” said Jones. “So you get the income stream and then at the end, you get your thousand dollars back.”
However, the German bonds sold Wednesday don’t pay any income. But even so, investors want to buy them. So much so that they bid up the price, which pushes the yield negative. Roughly a third of government bonds have negative yields, but Germany is the first Eurozone country to issue them.
“Everyone is nervous about the world,” said Kathleen Gaffney, the manager of the Eaton Vance Bond Fund. “They’ve seen volatility in the markets, you look at Brexit, you look at growth and employment.”
Buying these bonds, which are considered very safe, is similar to purchasing an insurance policy.
Some pension funds, institutional investors, and banks may need or even be required to hold bonds, in part to meet their payment obligations or balance out other riskier assets.
Additionally, bond buyers may not be long-term investors, said James Camp, head of fixed income at Eagle Asset Management.
“The average holding period even for a 30-year Treasury in the U.S. is less than a day,” he said. “These are investors that are betting against, or with, Central Bank policy, economic growth, and on a very short term basis.”