Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 104

Why investors buy bonds at negative yields

Numerous European countries now have short, medium and even long term government bonds issued in local currencies (including Euros) offering investors negative yields, such as Germany, Switzerland, France, Denmark, Netherlands, Sweden, and even Ireland and Portugal! Why would anyone invest when they receive less back on maturity than the original investment? It’s not for the interest payments – most offer interest coupons of only a fraction of a per cent.

The chart shows yields on 10 year government bonds rising during the 2010-12 ‘PIIGS’ crisis and then declining as Europe slowed into deflation prompting the start of Eurozone ‘quantitative easing’. The PIIGS countries of Spain, Italy and Portugal have experienced dramatic reductions in their borrowing costs. Bond yields fell again in March 2015 in most markets, with the main exceptions being Greece where yields rose as it lurches toward its third bailout or possible Euro exit, and Japan, where yields also rose a little with its money printing efforts and exit from recession.

European investors are either predicting decades of price deflation ahead, so a buyer could make a positive real return (after negative inflation), as Europe entered deflation late last year. Or they are simply terrified of putting their money anywhere else. They prefer buying loss-making bonds instead of just hiding their money ‘under the bed’ or in a safe at home or in a deposit box at their local bank branch, where they would at least get their money back intact. They seem to prefer the certainty of losing money invested in government debt rather than the remote risk of theft if their homes, banks or countries are invaded and plundered. Switzerland makes sense as a safe haven for Europeans, but Germany? Germans tried to conquer Europe by military force three times in the past 150 years!

With yields so low, investors are accepting longer and longer terms in the search for yield, fuelling a boom in multi-decade sovereign and corporate debt. On 10 March 2015 the UK government issued 53 year bonds at an incredibly low 2.62% yield as the UK enters deflation.

It is correct that most government bonds in the world (including Australia) are trading at a premium to par so investors who buy them now are guaranteed to make a capital loss. And that's if the government pays which it probably will, although Australia has defaulted in the past. And that's before inflation. If inflation rises from zero or negative at the moment back to rising a couple of percent, those long term bonds could drop by 20-30% in value.

There is a way out of losing money, of course. When a PIIGS country exits the Euro, its own currency is likely to plummet. If there is a ‘Grexit’, the Greek Drachma will probably drop 30-50%, so Greek investors in Euros will make handsome returns, even if they initially invest at negative yields. The low yields are a bet against the Euro holding together.

That's if the Germans give them their Euros back at maturity. In the meantime, European bonds and shares are generating outstanding returns in the short term under ‘QE Europe’ as yields fall, the Euro falls and share prices surge.

 

Ashley Owen is Joint CEO of Philo Capital Advisers and a director and adviser to the Third Link Growth Fund. This article is educational only. It is not personal financial advice and does not consider the circumstances of any individual.

 

  •   10 April 2015
  • 2
  •      
  •   

RELATED ARTICLES

Are bond yields lower forever or is the Big Bang coming?

Briefly, on the role of government bonds

A journey through the life of a fixed rate bond

banner

Most viewed in recent weeks

Indexation implications – key changes to 2026/27 super thresholds

Stay on top of the latest changes to superannuation rates and thresholds for 2026, including increases to transfer balance cap, concessional contributions cap, and non-concessional contributions cap.

The refinery problem: A different kind of energy crisis in 2026

The Strait of Hormuz closure due to US-Iran conflict severely disrupted global energy supply chains. While various emergency measures mitigated the crude impact, the refined product market faces unprecedented stress.

The missing 30%: how LIC returns are understated, and why it matters

The perceived underperformance of LICs compared to ETFs is due to existing comparison data excluding crucial information, highlighting the need for proper assessment and transparent reporting.

Little‑known government scheme can help retirees tap into $3 trillion of housing wealth

The Home Equity Access Scheme in Australia allows older homeowners to tap into their home equity for retirement income, yet remains underused due to lack of awareness and its perceived complexity.

Origins of the mislabeled capital gains tax ‘discount’

Debate over the CGT discount is intensifying amid concerns about intergenerational equity and housing affordability. This analysis shows that the 'discount' does not necessarily favor property investors.

Div 296 may mean your estate pays tax on assets your beneficiaries never receive

The new super tax, applying from 1 July, introduces more than just a higher rate on large balances. It brings into focus a misalignment between where wealth sits and where the tax on that wealth ultimately falls.

Latest Updates

The ultimate superannuation EOFY checklist 2026

Here is a checklist of 28 important issues you should address before June 30 to ensure your SMSF or other super fund is in order and that you are making the most of the strategies available.

Retirement

Two months into retirement

A retirement researcher's take on retirement and her focus on each of her six resource buckets to stay engaged during the transition and beyond.

Superannuation

Markets have always delivered for super fund members. What if they don’t?

What happens if market resilience in the face of ongoing geopolitical tensions ends? Potential decade-long market weakness shows the need for contingency planning.

Retirement

We tend to spend less in retirement …

Studies show that a drop in expenditure during retirement leads to a happier retirement. But when costs ramp up again later in life, it's a guaranteed income that makes spending more hurt less.

Shares

Can you value a share just using dividends?

A cow for her milk, a stock for her dividends. Investors are too quick to dismiss this valuation technique. 

Property

The 25-year property trust default is being questioned

The 33% CGT discount rate being floated isn’t random. It sits at the structural break-even between trust and company for the multi-property cohort. That’s driving the conversation we’re hearing now.

Investment strategies

Are active managers bringing a knife to a gunfight?

How passive investing has permanently changed market structure — and why sophisticated tools are now the price of survival.

Sponsors

Alliances

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.