Who Buys Negative Interest Rate Bonds?

For quite some time now, several governments have been issuing bonds with negative interest rates. Even some large corporations have been able to do so. Our gut reaction is to dislike negative interest rates—why, indeed, would anybody be fool enough to pay an interest rate in order to lend money, i.e. to take a risk without apparent reward? Buying a bond with a negative interest rate is basically the equivalent of your bank paying you to borrow money from them. It makes hardly any sense when looking at it this way, but there are actually many reasons to buy negative interest bearing securities.

A bit of economic theory

Before jumping into the topic, let's first consider interest rates from a theoretical point of view. Interest rates can be broken down as follows in traditional finance theory:

interest rate = real interest rate + inflation premium + default risk premium + liquidity premium + maturity premium

Let's take a look at a few notes about government bonds with negative interest rates:

Typically, negative interest rate bonds have a short maturity, and thus a low maturity premium, as it is not needed to reward investors for long-term risks if they purchase short-term securities. The liquidity premium is also very low: there is a huge secondary market, which means that it is easy to sell such securities. The default risk premium is also rock-bottom low. Governments are the most reliable economic agents when it comes to solvency. They sometimes default, but it is assumed that large western governments will not default on their debt. The inflation premium is also very low, as inflation is typically low in countries that issue negative interest rate bonds (see more below). Finally, the real interest rate, which consists in an opportunity cost (I lend you money; therefore I cannot consume now, nor can I invest in other things) is also very low: in a very volatile environment, where a lot of political and economic risks are present, government bonds act as a safe haven. Thus it is not shocking to pay to hold them. In short, negative interest rates are fully compatible with the above-mentioned economic theory. Let's now take a look at who precisely are the investors who buy such securities.

Regulatory pressures

Since the 2007 financial crisis and the fall of Lehman Brothers, authorities have tried to enforce regulations to ensure the stability and resilience of the financial system. Part of these regulations consist in forcing banks and...