Bonds Pay Less Than Zero As Investors Flee To Safety Germany became the latest country where investors are paying the government for the privilege of owning bonds. It's usually the other way around. Global economic fears are driving this unusual trend.

Bonds Pay Less Than Zero As Investors Flee To Safety

  • Download
  • <iframe src="" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
  • Transcript


Something remarkable happened in the bond market today. I know, the bond market. Just stay with me here. The yield on the 10-year year bond issued by the German government fell into negative territory for the first time. And here's what that means. If you bought one of the bonds and held onto it, you would actually lose money over time.

NPR's Jim Zarroli reports the drop in rates shows the growing nervousness about where the global economy is headed.

JIM ZARROLI, BYLINE: It is by now a familiar problem. Eight years after the subprime mortgage crisis, many of the richest and most developed countries of the world remain mired in slow growth, says MIT economist Simon Johnson.

SIMON JOHNSON: The fundamental facts of Japan and much of the Euro area are that growth is disappointing. Growth is low. Investors do not feel there are attractive places to put their money with good return to reasonable risk.

ZARROLI: Recently there's been something else to be worried about. Next week the United Kingdom will vote on whether to leave the European Union, and recent polls suggest the vote will be a lot closer than it once seemed. That's introducing a big, new level of uncertainty into the global economy, so a lot of investors are doing what they always do. They're pouring their money into government bonds. David Blanchflower is a professor of economics at Dartmouth.

DAVID BLANCHFLOWER: People are looking for safety. They're looking for places to park their money.

ZARROLI: This surging demand for government bonds is driving down interest rates in the United States. And in some wealthy countries such as Sweden, Denmark, Switzerland and now Germany, bond rates have actually fallen below blue zero, Simon Johnson says.

JOHNSON: We have some countries - the most notable are in Europe - where the investors are willing to buy bonds that have a negative yield so you don't get compensated for putting your money into these bonds. You actually - it's like paying a little tax, if you like.

ZARROLI: Buying a bond that's guaranteed to lose you money may seem like a pretty crazy thing to do. It's actually not as irrational as it seems. Money market economist Tom Simons of Jefferies and Company says a lot of bonds are bought by big institutional investors, and they don't usually hold onto them very long. They sell them.

TOM SIMONS: I think that when an investor buys, say, a 10-year bond at a negative yield, what they're thinking is that, I'll hold this for a short period of time, let all of the period of uncertainty sort of dissipate. And then at that point, I'll probably get out of it.

ZARROLI: As long as rates are falling, investors who sell bonds can still make a profit. The risk is that something unexpected can happen. Rates could suddenly reverse course, and a lot of big investors could lose huge amounts of money, Tom Simon says.

SIMONS: One might assume that if the outlook brightened just in general that there would be a mass exodus from the negative yielding assets and that everybody would be selling at the same time. And if that happens, then losses could be substantial.

ZARROLI: Last week one of the most famous bond investors in the world, Bill Gross, tweeted a warning about the bond market. He said there are now $10 trillion worth of negative rate bonds on the market. This is a supernova that will explode one day, he said. He later appeared to walk back the remarks a bit.

In fact, risks are nothing new in the bond market. Unexpected changes in interest rates mean big losses for some investors and big gains for others. Tom Simons says the fact that negative rates are growing more common could add a psychological element to the market. It could make some investors more nervous. They could react in ways they never have before. But no one knows for sure because the world of negative rates is still such a new one. Jim Zarroli, NPR News, New York.

Copyright © 2016 NPR. All rights reserved. Visit our website terms of use and permissions pages at for further information.

NPR transcripts are created on a rush deadline by Verb8tm, Inc., an NPR contractor, and produced using a proprietary transcription process developed with NPR. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.