It seems asinine, but more than $7 trillion worth of government debt now offers a negative return. That's right – trillions of dollars of government debt offer yields of less than 0%. But suffice it to say that negative rates don't necessarily guarantee a negative return, nominal or real. Investors can actually make money buying bonds at a negative interest rate.
In this segment of Industry Focus: Financials, The Motley Fool's Gaby Lapera and Jordan Wathen tackle negative yields on government bonds, and why investors are willing to lock up their money for negative returns.
A transcript follows the video.
This podcast was recorded on March 7, 2016.
Jordan Wathen: And luckily, so far, at least as far as I can tell, that I've seen, and maybe someone out there can prove me wrong, but this hasn't yet affected individuals. So, banks in Europe are still paying one basis point, so, 0.01% on your money. But, for institutions, it's certainly a problem, because they have so much, there's so much capital, that they can't just go put it in a storage shed. Right?
Gaby Lapera: And they're international organizations, so they need to be able to keep their money in a place where they can access it easily and send it across the world easily.
Wathen: Right, exactly. Bloomberg reported, actually, that $7 trillion of government debt around the world is actually currently yielding an interest rate of less than 0%. So, investors are willing to lose money on $7 trillion capital, essentially, to have a safe place to store it.
Lapera: Yeah. So, not only is it just having a safe place to store it, but some people are saying that part of the reason people aren't moving it is that it's just convenient to have it in your bank as opposed to underneath your mattress.
Wathen: Right, that's one of the things. It's kind of weird, as we think about it, as individuals, you wonder, why would anyone ever go out and buy a bond that pays a negative interest rate, right? It's just so asinine to even think about, that you might give someone the opportunity to use your money for short amount of time and get less back. But, one of the things you have to understand is, there's actually away to make money from this. You could buy a bond at a -1% interest rate and sell it at a -2% yield, and actually make money because the bond will go up in value. The basic premise behind bonds is, if interest rates go down further, the bond value goes up.
Lapera: Ooh. That makes a lot of sense, I hadn't actually even thought about it that far, I was just like, "Let's talk about negative interest rates." That is really interesting.
Wathen: It's kind of speculative. Obviously, you're still taking that risk that interest rates don't go lower and you end up losing money, so you end up getting paid off and you've accepted that negative yield.
Lapera: You know what would be really interesting? Is if negative interest rates stayed low for long enough, and then they continued to become more negative, I think it would have to change payment structures, wouldn't it? People would say, you can't pay up front, you have to wait 60 days to pay.
Wathen: (laughs) That's the interesting thing, right? If you lose money in a negative-interest rate world, you might have done better than you should have.
Wathen: It's completely asinine. And normally, negative interest rates are something that's associated with deflation, so, prices going down. So, maybe in nominal terms, you've lost money, but not in real terms. So, prices are going down faster that you're losing money on your investment. But, that's kind of scary, too, because, let's say you run a business, and prices go down by 5%. So, you paid your employee $100,000 last year, and this year, you say, "Hey, you're getting a raise, buddy! We're going to pay you $98,000 -- because prices went down by 5%, this is technically a raise."
Lapera: Oh my gosh. I feel--
Wathen: Yeah, just, beyond financial reasons, there's so many social costs that come with this. And economists call this sticky wages, that businesses would prefer to cut people than cut people's wages, because it's a horrible thing to try to convince people that this is better for them.
Lapera: Right. This is crazy. I feel like -- I don't know if it's just being leftover-sick. I don't know. I feel like I've eaten a substance that is not legal.
Wathen: Right. Totally Fantasyland, right?
Lapera: Yeah, it's crazy.
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.