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

How cutting the CGT discount could help rebalance housing market

A more rational taxation system that supports home ownership but discourages asset speculation could provide greater financial support to first home buyers.

3 ways to fix Australia’s affordability crisis

Our cost-of-living pressures go beyond the RBA: surging house prices, excessive migration, and expanding government programs, including the NDIS, are fuelling inflation, demanding bold, structural solutions.

Is there a better way to reform the CGT discount?

The capital gains tax discount is under review, but debate should go beyond its size. Its original purpose, design flaws and distortions suggest Australia could adopt a better, more targeted approach.

Making sense of record high markets as the world catches fire

The post-World War Two economic system is unravelling, leading to huge shifts in currency, bond and commodity markets, yet stocks seem oblivious to the chaos. This looks to history as a guide for what’s next.

Welcome to Firstlinks Edition 648 with weekend update

This is my last edition as Editor of Firstlinks. I’m moving onto a new role though the newsletter will remain in good hands until my permanent replacement is found.

  • 5 February 2026

It’s economic reality, not fear-based momentum, driving gold higher

Most commentary on gold's recent record highs focus on it being the product of fear or speculative momentum. That's ignoring the deeper structural drivers at play. 

Latest Updates

Superannuation

Super is catching up, but ageing is a triple-threat

An ageing Australia is shifting the superannuation system’s focus from accumulation to the lifecycle of retirement. While these pressures have been anticipated for decades, they are now converging at scale and driving widespread industry change.

Investment strategies

Corporate earnings show resilience against volatility but risks remain

Evidence for a strong reporting season had been piling up for months and validated an upgrade cycle already underway. However, risks remain from policy uncertainty.

Superannuation

Want your loved ones to inherit your super? You can’t afford to skip this one step

One in five Australians die before retirement and most have not set up their super properly so their loved ones can benefit from all their hard work and savings. 

SMSF strategies

Sixteen steps in a typical SMSF borrowing

Getting a mortgage is never an easy process but when an investment property is purchased in a SMSF the complexity increases significantly. Read this before taking the plunge. 

Planning

Do HNWI get better advice?

Good advisers lead to more diversification, lower turnover and less home bias. However, studies show the average adviser may not be adding much value to clients. 

Strategy

AFL Final Ten with wildcard edit 'unlevels' the field

When the new AFL season kicks off a wild-card will be added to the finals. Is this new formula fair and how does it impact the odds of winning the premiership.

Planning

Love them or hate them, it's worth understanding annuities

Investors have historically balked at exchanging a lump sum for a future steam of income. Breaking down the financial and emotional considerations of purchasing an annuity.        

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.