Today, the entire global bond market (government, corporate, etc.) is valued at roughly $55 trillion. Of that, a whopping $17 trillion actually offers a negative return on investment if held to maturity, according to the graph below from Bloomberg. For example, a German 10-year government bond with a current price of €102.50 and an interest rate of 0%, after 10 years, would earn no inter-est and pay out merely its face value of €100. The up-front premium of €2.50 would represent an annual yield of -0.25%.
This recent phenomenon of negative yields is almost unprecedented. NYU busi-ness professor Richard Sylla confirmed to Howard Gold at MarketWatch in July that, except a brief period in 1940-41 when short-term U.S. bond yields turned negative in the aftermath of the Great Depression, the world has not seen such conditions since ancient Babylon circa 1800 B.C. Moreover, that $17 trillion in negative-yield debt is essentially double what it was just at the beginning of the year, begging the question: Why would investors want an investment that will surely lose them money?
The answer is their relative safety. As investors around the world grow increas-ingly nervous about slowing economic growth and escalating geopolitical ten-sions (e.g., U.S.-China trade war, Brexit, Iran), they view government bonds of developed countries as relatively safe investments when compared with certain other, potentially riskier investment vehicles, such as commodities, equity mar-kets, and emerging-market bonds.
Another factor is the inverse relationship between bond yields and bond prices: When yields go down, prices go up. As more investors pour money into bonds, yields may continue to drop, but the increase in their price may more-than-offset that, leading to a positive net return as long as the bond is not held to maturity. Therefore, positive shorter-term returns are possible, and, in any event, slightly negative returns may be better than the perceived risk of even worse returns elsewhere.
Most of these negative yields are on European and Japanese government bonds. U.S. bonds still offer a positive return, albeit a small one (near 2%). Because U.S. Treasuries are considered the safest bonds in the world, investors are pouring money into them and driving U.S. interest rates lower. Ironically, this is a key reason for the recent inversion in the U.S. yield curve, which has historically been a leading indicator of the very recession that those same investors fear in turning to this investment option in the first place.