Who Would Buy a Bond That Is Guaranteed to Lose Money?

Who on earth is making an investment that guarantees a loss?

Apparently a lot of people—or a few folks with a lot of money—because interest rates around the world are declining and in many countries, negative. Most of these bonds are short-term government bonds from Switzerland, Japan and Germany. However, the fear is growing:

“Germany sold 30-year debt at a negative yield for the first time, as investors desperate for safe assets bet that further falls in yields will boost the value of the bonds in the future.” (1) Read more here.

Not just governments, but some companies are able to issue bonds at historically-low interest rates, with such a demand, that the investors’ yield is negative. What is astonishing is the size of the loser-corporate-bond market: $1 trillion! (2) Read more here.

Can someone make money in a loser bond?

A recent article attempts to paint this historic situation in a bright light, but I’m not convinced. (3) Read more here.

Basically, their argument amounts to the old financial maxim: as bond yields go down, bond prices go up. If you think things are going to get worse, more people will buy more bonds in the future, then prices will go up more in the future, and you can sell your bonds. Then someone else will be left “holding the bag,” so to speak.

Another (more obtuse) argument has to do with currency hedging. Just because it’s a loser in the home country doesn’t mean it’s a loser in another country, if the foreign investor knows future currency changes. No one does know the future, but I digress.

Who is buying this stuff?

Three big buyers move the loser bond market:

Central banks, pension funds and other large institutions with fixed expense obligations. Some of these organizations must buy the bonds—that’s their modus operandi. Others have to find liquidity to make their payments—and at least government bonds can be sold (to those institutions that must buy them). A loser bond which loses only a little but provides liquidity, is just a cost of their business model—but not ours. Loser bonds are not good for us real people, especially if we’re retired.

A fourth buyer of these guaranteed losers are the speculators. If you think things are going to get worse, then perhaps you’ll lose less here than you would elsewhere. But why wouldn’t you just own cash? The answer to that question, my friends, must rest with the speculative buyer.

Guaranteed to lose you only a little bit of money if you can wait 30 years

I’ll bet in 30 years any real person still holding a loser bond they bought at today’s prices will regret it. They will likely have paid a huge opportunity cost. I believe the rates will likely increase by then. What do you think?
Create another beautiful week!

 

Source:

(1) https://www.wsj.com/articles/germany-for-first-time-sells-30-year-bonds-offering-negative-yields-11566385847

(2) https://www.cnbc.com/2019/08/21/negative-yielding-debt-poses-major-risks-for-investors.html

(3) https://www.marketwatch.com/story/that-near17-trillion-pile-of-negative-yielding-global-debt-its-a-cash-cow-for-some-bond-investors-2019-08-22

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