Money for Nothing

People typically make investments to earn money. Seems pretty logical. But recently a number of governments, like Japan and Germany, have been issuing bonds with a negative yield, meaning an investor would lose money if they held the bond to maturity. Basically, the purchaser of such a bond is paying someone to hold their money.

It makes sense for governments to do this. They can obtain cheap money. But why would investors make such an unattractive bargain?

One reason is fear in an uncertain world. Investors are willing, in essence, to "pay a fee" to get their money back. Another reason to buy negative yielding bonds is to try to make money. If interest rates decline even further, an investor can sell their bonds for a profit.

Interest rates may remain modest, at best, for a while. Central Banks around the world have been keeping interest rates low to try and spur economic activity, arguably with limited success. Moreover, as the investment firm PIMCO points out, there is a global savings glut -- more people want to save than want to borrow money for economic activity. The excess cash looking for a safe home helps to keep interest rates in the near-zero range.

The extraordinarily low interest rate environment is not an appealing situation. It punishes savers and incentivizes people to take on greater investment risk in order to achieve decent returns. The stock market has benefited from this boost. The situation, however, warrants caution going forward.

Words of Wisdom

[On pessimism] Some mornings, it's just not worth chewing through the leather straps.

-- Emo Philips??