Question

1. 3.9 [Related to Making the Connection 17.2] An article in The Wall Street Journal in 2015 reported that the interest rate on five-year German government bonds had become negative: ‘The negative yield means investors are effectively paying the German state for holding its debt.’ The article quoted an investment analyst as saying: ‘The negative yield is not scaring investors away’ (Bartha & Edwards, 2015).3

   1. What caused the interest rate on German government bonds to become negative?

   2. Why are investors willing to buy bonds with a negative interest rate?

Answer 1

( a ) Germany's 10 year bond yield turned negative for the first time this year.

Global uncertainties, fall in cost of borrowing with negative interest rate offered by the central banks in the developed world, Brexit and US-China trade war has made economic growth outlook negative. All these negative developments caused the German government bonds to become negative.

( b ) Following are various reasons why investors are willing to buy bonds with a negative interest rate:-

( I ) Global uncertainties has forced the investors to seek extremely safe investment products. Germany's government bonds are considered one of the safest haven for investors money.

( II ) Most of the bonds have been purchased by central banks showing the central bank managers' willingness to put money towards building reserves rather than earning returns.

( III ) Buying of these German bonds by China shows their focus on diversifying their reserves from US dollars to euro.