Who buys bonds with a negative interest rate?

Hi there,

I’ve recently stumbled upon an article about portfolio allocation by a respected Swiss financial source, and I’ve noticed that a significative percentage (10%) of the proposed portfolio for a high-risk profile would be invested in Swiss government bonds.

Interestingly enough, a lot (if not almost all) of the Swiss government bonds currently have a negative interest rate.

So I wonder why someone should invest in such bonds? What’s the logical explanation?

Lack of alternative (institutions can’t just create bunch of accounts in various banks), or regulatory obligations.

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What’s more, some people think that the rates can/will go down, which make the price of the bonds go up.

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If you’re an institutional actor and must park a large amount of liquid assets, then you might end up paying more in negative interests at a regular bank or the central bank.

Or, maybe for regulatory reasons, security is very important to you. Government bonds are safer than bank accounts (see the concept of the sovereignty principle).

For a private investor, in my most humble opinion, government bonds with negative yield make no sense, though…

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I don’t see the point even for corporate bonds (with ridiculously low coupons even before tax) and the risks of rising interest rates. You are almost guaranteed to get negative return

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…which leads to funny situations like this:

image

It’s a Swiss government bond.
Side note: the market is betting too that the yield to maturity (in 2049) is -0.15%…

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When I think of bonds, I think of a risk-free asset that should give me stability, security, and liquidity.

Hence, I consider only domestic government bonds.

Foreign bonds of any kind carry a currency risk, among other things. Corporate bonds carry the risk inherent to the company. If I want to take those risk and (hopefully) be rewarded with returns, I’d rather buy shares.

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Since 2009 we have, instead of risk-free returns, return-free risks :slight_smile:

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I assume you’re a Swiss resident? As mentioned before, Swiss government bonds currently have negative interests even at 50y projection. So, not sure why we should add Swiss government bonds to our portfolio.

They’re not saying we should :slight_smile: This is a response to corporate vs. sovereign bonds.

Quoting from earlier:

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Potentially rising interest rates are another poison for bonds. The longer the bond runs the bigger the value drop if an interest rate goes up. I hope everyone understands this. I also found out only too late

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You can hold it until it expires. You don’t really lose anything, you just miss out on higher interest rates.

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Unless you need the money. For instance, if you are retired…

Doesn’t really change anything. Lets assume you bought bond A for 10k with 1% interest that will expire in 10 years, so you’ll get 11k back after 10 years. Now interest rates go up to 2% and there is a new bond B. Very simplified bond As value will drop to 9k, but you still get your 1% yearly return till it expires. Also your 10k principal. You could also sell it at a loss, buy the new bond B and hold that for 10 years, resulting in 9k + 2k and you end up with the same 11k.

BTW, where can you buy bonds? I checked on Swissquote and they don’t show you bonds at all, even if they do sell them.

If you need to sell and spend the money (no reinvestment), you take a loss!

Aren’t you losing money because of the inflation? Or bonds are automatically adjusted for inflation?

Did you realize that the topic is about bonds with negative interest rates? Sure, hold your bond, receive your negative interest (i.e pay money to the borrower), and receive the principal back in 10-15 years. And tell me if you did not lose money overall.

One thing: if we hold 80% stocks and 20% bonds and there is a stock market crash, the bonds could probably gain in price, since they deliver fixed income (which is better than falling stocks for a panicking investor). Moreover, the government usually reacts by lowering interest rate to “stimulate the economy” and “provide liquidity”. Of course, one may ask how low can you go if you’re already negative, but who knows that…

So what I mean is something like this:
your stock price is 80, bond price is 20. Then a crash happens, stock price is 50 and bond price is 25. So your stock-bond allocation switched to 67/33%. So you can rebalance: you sell 10 bond and buy 10 stocks to have 60/15 split. This should allow you to benefit from the stock market recovery.

I guess that’s the idea behind holding some bonds, right? Your portfolio is more robust and has a higher survival rate over long periods.

I had some Bond ETFs. I guess they scale better than direct Bonds. And you can ‘forever’ hold bonds with a certain time to maturity. On the other hand you can ‘enjoy’ value adjustments immediately

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