WHY WOULD THE RICH CHOOSE TO ACCEPT A NEGATIVE RETURN ON THEIR MONEY? This article in the Buttonwood section of the Economist (January 24) points out that “government bonds of various maturities in as many as ten countries are selling at negative yields”. Buttonwood asks: “Why on earth would bond investors…be willing to accept such a lousy deal?” The basic reason that Buttonwood gives is caution—or fear. Holding physical cash in enormous amounts is not practical. The investors are in effect choosing to keep their holdings in cash, and the negative interest rate is a custody fee.
A more difficult question is why investors would pay for a negative yield on ten year bonds. Taking long-term bonds as a forecast of future short-term interest rates suggests that investors as a whole expect negative short rates for a number of years. Buttonwood suggests that some purchasers of long-term bonds are hoping to gain from either currency movements or the introduction of quantitative easing by the European Central Bank. These explanations for longer term negative interest rates also reflect caution and uncertainty and a perspective that the negative interest rate is considered as a cost of holding an alternative to cash.