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Interest on German bonds falls below zero

Posted by Richard on January 13, 2012

This just boggles my mind. Investors are paying the German government to take their money and hold onto it for 3 to 12 months:

Continuing the schizoid overnight theme, we look at Germany which just sold €3.9 billion in 6 month zero-coupon Bubills at a record low yield of -0.0122% (negative) compared to 0.001% previously. The bid to cover was 1.8 compared to 3.8 before. As per the FT: “German short-term debt has traded at negative yields in the secondary market for some weeks with three-month, six-month and one-year debt all below zero. Bills for six-month debt hit a low of minus 0.3 per cent shortly after Christmas…

Why would any rational person buy a bond that pays negative interest when they have a perfectly good mattress to put the cash under?

One of the commenters at Zero Hedge described it succinctly:

It’s like Ho’s paying tricks for sex.

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3 Responses to “Interest on German bonds falls below zero”

  1. jed said

    It certainly does boggle. I figure there must some sort of strange arbitrage scheme involved here, otherwise, what would be the point for the buyer?

    • Think of it as insurance against theft. If all you really care about is the safety of your principal, it may be worthwhile to pay a small premium to get it.

      • Richard said

        I imagine you’re right about the motivation, David. But it still seems pretty dumb to me. Ten-year T-bills are paying less than 2% — but at least it’s a positive return. And you can do much better with little or no additional risk in an investment-grade corporate bond fund.

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