Investors are going bonkers for bonds

published 18 July 2019

German Reichstag building © — German debt is deemed Europe's safest asset

Germany has sold a tranche of bonds that pay no interest, reports Adam Samson in the Financial Times. In a further sign of the mania gripping the bond market, Berlin issued €3.15bn of "zero-coupon" ten-year debt last week.

So investors are willing to miss out on annual interest payments to hold German paper, considered Europe's safest asset. The auction finished with a negative yield of 0.26%, meaning that buyers would lock in a small loss if they held the paper until maturity. This is the second time that Germany has managed to issue such zero-coupon debt.

Worldwide, more than £10trn-worth of government and some corporate bonds are now trading on a negative yield. The phenomenon is underpinned by quantitative-easing policies from central banks that have seen them buy up trillions of dollars of debt, regardless of the price.

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The US Federal Reserve, for instance, owns $2.1trn in Treasury bonds. The mania for bonds means that more than a dozen supposedly high-risk corporate junk bonds are trading in Europe on a negative yield, notes Paul Davies in The Wall Street Journal. "Ultra-loose monetary policies have turned debt investing into a choice about how to lose the least amount of money."

Many will still be hoping for a profit, of course. The German ten-year bond, for example, has traded on yields as low as 0.40% this month. Those who bought the asset on a negative yield may still realise a capital gain so long as they can sell it on at a higher price to a "greater fool" willing to take on an even worse rate of return.

Investors are betting that central-bank activism has abolished risk, says Robert Burgess on Bloomberg. Yields on two-year Italian debt fell below 0% this month. This in a country "on the verge of fiscal crisis" barely a month ago. "Logic has been suspended."

Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.

Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.

He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.

Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.