<p>There are several reasons why it makes still sense.</p>

<ol>
<li><p>Nominal negative return does not mean that real return is negative. There is a difference between nominal interest rates and real interest rates which can be expressed by the Fisher formula:</p>

<p><span class="math-container">$$ i \approx r + \pi$$</span></p></li>
</ol>

<p>Where, <span class="math-container">$i$</span> is the nominal interest rate, <span class="math-container">$r$</span> is the real interest rate and <span class="math-container">$\pi$</span> is inflation. If the nominal interest rate is <span class="math-container">$-10\%$</span> but economy is experiencing <span class="math-container">$20\%$</span> deflation (that is <span class="math-container">$\pi = -20\%$</span>)  the real interest rate will be <span class="math-container">$10\%$</span> which means you are still earning <span class="math-container">$10\%$</span> on your investment in real terms. Ultimately what matters for you is the real interest not nominal one because money changes in value due to inflation/deflation and real interest rate accounts for that. If someone promises you interest <span class="math-container">$5\%$</span> but inflation over the same period of time is <span class="math-container">$10\%$</span> it's still a terrible deal no matter that the nominal interest rate is positive and relatively high because that implies that money looses its value so fast that <span class="math-container">$5\%$</span> interest rate is not enough to even break even. </p>

<p>Hence, it is the real interest that matters and negative nominal interest rate does not automatically imply negative real interest rate. </p>

<ol start="2">
<li>Sometimes real interest rate can become negative as well. In that case people might still chose to make an investment at a real negative interest rate because holding cash is expensive in itself. If you have <span class="math-container">$\$1,000,000$</span> you cant simply stuff it under mattress. You would have to buy expensive safe, security, insurance and so on (or failing to do that exposing yourself to risk of loosing them due to accident/robbery). Hence, people will be willing to accept even negative real interest rates as long as the real negative interest rate is not so much negative that it becomes more profitable to just cash out and make it secure yourself.</li>
</ol>

<hr>

CC BY-SA 4.0
2020-05-21T20:56:34.560Z
1: In reality the "healthy" economy has an inflation of around 3%. In a recession, (where interest rates can get negative) the economy slows down that is deflationary, but with money printing it's overall inflationary. So while in theory your calculation works, the real interest rate is always lower than nominal, so it still doesn't make sense for a household or anyone to buy negative yielding bonds.
2: I still don't get it why wouldn't it worth more for an individual to keep it as a deposit in a bank. In that way it's liquid, and has a low positive interest on deposit on it, which is better.
curiousTrader
CC BY-SA 4.0
2020-05-21T21:14:20.883Z
@curiousTrader 1. it is not true that "real interest rate is always lower than nominal". in fact recently in US the estimated real interest rate was higher than nominal one as the picture in link from Mishkin textbook shows. Also, there are some other countries where that happened more often. https://uploads-cdn.omnicalculator.com/images/real_interest_rate/real_rate.png. 2. if economy experiences negative interest rate bank deposit interest rate will be most likely negative as well as in NL now for any large sums (ABN amro applies them to deposits above 2,500,000e),
1muflon1
CC BY-SA 4.0
2020-05-21T22:58:32.590Z
I see, it was just hard to imagine it from a household point of view. So with large sums, the interest on gov bond is higher than on bank deposit, even though both of them are negative. Thanks!
curiousTrader
CC BY-SA 4.0
2020-05-21T20:37:14.593Z
2020-05-23T07:06:54.557Z
2020-05-23T07:06:54.557Z
1muflon1
<p>Under most circumstances, bonds is the most secured asset deposit method.</p>

<ol>
<li><p>Physical cash storage is hard to implement securely. Theft and disaster damage are expensive to guard against. Real estate costs increases linearly with volume.</p></li>
<li><p>Bank accounts are much cheaper and could be profitable (positive yield) and safe enough for most people (government insurance covers each person at each bank to $250k in US, 85k pounds in UK). However if you have millions of dollars to deposit (quite easily reached for any business), the risk of bank failing on you starts to show up.</p></li>
<li>Government bonds could offer stronger backing for the deposit, if said government show strong resilience than any of the banks available. In this case, the depositor may choose to buy government bond even when the yield is low or negative.</li>
</ol>

<p>The pricing power that the government uses to push negative rates comes from its strong resilience to crisis relative to other institutions. The other extreme is also true: if the government is facing insolvency and its bond carries huge risk, then their yield skyrockets. </p>

CC BY-SA 4.0
2020-05-22T16:58:41.973Z
2020-05-22T16:58:41.973Z
user3528438
<p>The reason nobody else has cited: repo collateral.</p>

<p><a href="https://alhambrapartners.com/2020/03/18/theyre-here-negative-ust-yields-finish-off-the-collateral-case/" rel="nofollow noreferrer">https://alhambrapartners.com/2020/03/18/theyre-here-negative-ust-yields-finish-off-the-collateral-case/</a></p>

<p>"Collateral calls mean in some cases using gold as a last resort (which gets dumped immediately) and in others the buying of pristine collateral at any price. Gold is slammed while T-bill prices skyrocket, their yields plummet. For those unlucky enough to have neither option in front of them, fire sales of assets including stocks and other risk credits...</p>

<p>... Given these market fire sale conditions, obvious signs of gross systemic illiquidity, the Fed’s auctions should be bid full up to the limit each and every one. The demand for liquidity, any spare liquidity, is through the roof curiously everywhere except here.</p>

<p>The answer can only be collateral. In order to bid for the Fed’s bank reserves in any of these FRBNY operations, you have to post some of eligible MBS, agency debt, or UST’s. And when you do, whatever collateral you put up becomes encumbered (which means no repledging)."</p>

<p>A debt instrument, even if negative yielding, can still provide fuel for "rehypothecation", esp. in the off-book, unmeasured by monetary aggregates, shadow banking / eurodollar system.</p>

<p>If you look for "answers" to the repo rate spike in fall 2019</p>

<p><a href="https://www.google.com/search?q=repo+rate+spike" rel="nofollow noreferrer">https://www.google.com/search?q=repo+rate+spike</a></p>

<p>... what you'll almost never hear is the idea that quantitative tightening, or the easing of quantitative easing - which tightened supply in the bond market - might have contributed to overnight repo rates touching 10%. Note that this also impacted the actual IOER, threatening to "uncork" the real overnight interbank rate. This would mean total loss of control by the Fed.</p>

<p>Overnight components overview:
<a href="https://www.newyorkfed.org/aboutthefed/fedpoint/fed15.html" rel="nofollow noreferrer">https://www.newyorkfed.org/aboutthefed/fedpoint/fed15.html</a></p>

<p>Typical msm article about the repo blowup:
<a href="https://www.bloomberg.com/news/articles/2019-09-16/repo-market-chaos-drives-overnight-rate-up-by-most-in-months" rel="nofollow noreferrer">https://www.bloomberg.com/news/articles/2019-09-16/repo-market-chaos-drives-overnight-rate-up-by-most-in-months</a></p>

<p>Keep in mind, price is inverse to yield. More supply -> lower price -> higher yield. If you look at the yield of the benchmark US 10 year over the last few years, you'll see it climb into autumn '18, which was the first "blip" in the repo market. It made a double top around 3% with its 2014 high, and has been tanking ever since.</p>

CC BY-SA 4.0
2020-05-23T14:30:08.317Z
2020-05-23T14:30:08.317Z
ccy
<p>I get that people buy long term government bonds, because of how safe it is, and if there would be a recession the government would just print more money and could pay it back. </p>

<p>But why would anyone buy a bond, that yields a negative return? If i would just keep my money in fiat, it would just depreciate in the 10 years, but after the 10 years it would still be more than investing it in a safe negative rate.</p>

CC BY-SA 4.0
2020-05-22T12:50:47.243Z
Related: https://economics.stackexchange.com/questions/10637/why-should-i-get-a-bond-with-negative-interest-instead-of-having-a-bank-deposit
Henry
CC BY-SA 4.0
2020-05-22T16:38:39.137Z
If you have a tremendous amount of money then the bank failing is a legit risk (insurance only covers $250K in US, 85K in UK so really not hard to hit this limit), so is your private cash deposit being stolen or damaged. Among those three options (physical cash, bank account and treasury), government bond is costly but safest. Physical cash storage gets expensive when the volume and threat level goes up, too.
user3528438
<interest-rate><government-debt><bonds>
Why do people buy negative interest rate bonds?
curiousTrader
# Why do people buy negative interest rate bonds?

(Asked by: username_0 on 2020-05-21)

I get that people buy long term government bonds, because of how safe it is, and if there would be a recession the government would just print more money and could pay it back.

But why would anyone buy a bond, that yields a negative return? If i would just keep my money in fiat, it would just depreciate in the 10 years, but after the 10 years it would still be more than investing it in a safe negative rate.

**Tags:** interest-rate, government-debt, bonds
> **Comments:**
> **username_1**: Related: https://economics.stackexchange.com/questions/10637/why-should-i-get-a-bond-with-negative-interest-instead-of-having-a-bank-deposit  
> **username_2**: If you have a tremendous amount of money then the bank failing is a legit risk (insurance only covers $250K in US, 85K in UK so really not hard to hit this limit), so is your private cash deposit being stolen or damaged. Among those three options (physical cash, bank account and treasury), government bond is costly but safest. Physical cash storage gets expensive when the volume and threat level goes up, too.  

---

## 3 answers

### Answer by username_3 on 2020-05-21. Score: 8

There are several reasons why it makes still sense.

1. Nominal negative return does not mean that real return is negative. There is a difference between nominal interest rates and real interest rates which can be expressed by the Fisher formula:

   $$ i \approx r + \pi$$

Where, $i$ is the nominal interest rate, $r$ is the real interest rate and $\pi$ is inflation. If the nominal interest rate is $-10\%$ but economy is experiencing $20\%$ deflation (that is $\pi = -20\%$) the real interest rate will be $10\%$ which means you are still earning $10\%$ on your investment in real terms. Ultimately what matters for you is the real interest not nominal one because money changes in value due to inflation/deflation and real interest rate accounts for that. If someone promises you interest $5\%$ but inflation over the same period of time is $10\%$ it's still a terrible deal no matter that the nominal interest rate is positive and relatively high because that implies that money looses its value so fast that $5\%$ interest rate is not enough to even break even.

Hence, it is the real interest that matters and negative nominal interest rate does not automatically imply negative real interest rate.

2. Sometimes real interest rate can become negative as well. In that case people might still chose to make an investment at a real negative interest rate because holding cash is expensive in itself. If you have $\$1,000,000$ you cant simply stuff it under mattress. You would have to buy expensive safe, security, insurance and so on (or failing to do that exposing yourself to risk of loosing them due to accident/robbery). Hence, people will be willing to accept even negative real interest rates as long as the real negative interest rate is not so much negative that it becomes more profitable to just cash out and make it secure yourself.

---

> **Comments:**
> **username_0**: 1: In reality the "healthy" economy has an inflation of around 3%. In a recession, (where interest rates can get negative) the economy slows down that is deflationary, but with money printing it's overall inflationary. So while in theory your calculation works, the real interest rate is always lower than nominal, so it still doesn't make sense for a household or anyone to buy negative yielding bonds. 2: I still don't get it why wouldn't it worth more for an individual to keep it as a deposit in a bank. In that way it's liquid, and has a low positive interest on deposit on it, which is better.  
> **username_3**: @curiousTrader 1. it is not true that "real interest rate is always lower than nominal". in fact recently in US the estimated real interest rate was higher than nominal one as the picture in link from Mishkin textbook shows. Also, there are some other countries where that happened more often. https://uploads-cdn.omnicalculator.com/images/real_interest_rate/real_rate.png. 2. if economy experiences negative interest rate bank deposit interest rate will be most likely negative as well as in NL now for any large sums (ABN amro applies them to deposits above 2,500,000e),  
> **username_0**: I see, it was just hard to imagine it from a household point of view. So with large sums, the interest on gov bond is higher than on bank deposit, even though both of them are negative. Thanks!  

---

### Answer by username_2 on 2020-05-22. Score: 1

Under most circumstances, bonds is the most secured asset deposit method.

1. Physical cash storage is hard to implement securely. Theft and disaster damage are expensive to guard against. Real estate costs increases linearly with volume.
2. Bank accounts are much cheaper and could be profitable (positive yield) and safe enough for most people (government insurance covers each person at each bank to $250k in US, 85k pounds in UK). However if you have millions of dollars to deposit (quite easily reached for any business), the risk of bank failing on you starts to show up.
3. Government bonds could offer stronger backing for the deposit, if said government show strong resilience than any of the banks available. In this case, the depositor may choose to buy government bond even when the yield is low or negative.

The pricing power that the government uses to push negative rates comes from its strong resilience to crisis relative to other institutions. The other extreme is also true: if the government is facing insolvency and its bond carries huge risk, then their yield skyrockets.


---

### Answer by username_4 on 2020-05-23. Score: -1

The reason nobody else has cited: repo collateral.

<https://alhambrapartners.com/2020/03/18/theyre-here-negative-ust-yields-finish-off-the-collateral-case/>

"Collateral calls mean in some cases using gold as a last resort (which gets dumped immediately) and in others the buying of pristine collateral at any price. Gold is slammed while T-bill prices skyrocket, their yields plummet. For those unlucky enough to have neither option in front of them, fire sales of assets including stocks and other risk credits...

... Given these market fire sale conditions, obvious signs of gross systemic illiquidity, the Fed’s auctions should be bid full up to the limit each and every one. The demand for liquidity, any spare liquidity, is through the roof curiously everywhere except here.

The answer can only be collateral. In order to bid for the Fed’s bank reserves in any of these FRBNY operations, you have to post some of eligible MBS, agency debt, or UST’s. And when you do, whatever collateral you put up becomes encumbered (which means no repledging)."

A debt instrument, even if negative yielding, can still provide fuel for "rehypothecation", esp. in the off-book, unmeasured by monetary aggregates, shadow banking / eurodollar system.

If you look for "answers" to the repo rate spike in fall 2019

<https://www.google.com/search?q=repo+rate+spike>

... what you'll almost never hear is the idea that quantitative tightening, or the easing of quantitative easing - which tightened supply in the bond market - might have contributed to overnight repo rates touching 10%. Note that this also impacted the actual IOER, threatening to "uncork" the real overnight interbank rate. This would mean total loss of control by the Fed.

Overnight components overview:
<https://www.newyorkfed.org/aboutthefed/fedpoint/fed15.html>

Typical msm article about the repo blowup:
<https://www.bloomberg.com/news/articles/2019-09-16/repo-market-chaos-drives-overnight-rate-up-by-most-in-months>

Keep in mind, price is inverse to yield. More supply -> lower price -> higher yield. If you look at the yield of the benchmark US 10 year over the last few years, you'll see it climb into autumn '18, which was the first "blip" in the repo market. It made a double top around 3% with its 2014 high, and has been tanking ever since.


---

