5: Why would anyone want to buy an asset that they

8: knew would lose money?

14: Like any fixed interest rate asset,

17: when you buy a bond if you pay a higher price for it

20: you get less back in terms of yield.

23: Now yield just refers to the interest rate

25: that a lender gets in return for lending money.

34: So just remember the higher the price, the lower the yield.

38: The two have an inverse relationship.

40: Now this chart is looking at the yield

42: on the German 10-year government bond, which they call the bund.

49: Now as you could can see the yield on the bund

52: has been declining, and declining

53: so much lately that it's actually

55: gone into negative territory.

58: And it's trading right now between negative 0.2

61: and negative 0.3 per cent.

64: This happened for the first time back in 2016,

68: but we're actually at a lower rate

70: now than we were back then.

73: What this means essentially is that people

75: are paying such a high price for these German bunds

78: that they know that they're paying for more

81: than they're going to get back.

83: Why would anyone do this?

85: They're paying for the privilege of losing money.

87: Why wouldn't you just hold on to it?

90: Well let's start by talking about European banks.

94: The ECB charges European banks 0.4 per cent

98: to hold their money in deposits.

103: Now negative 0.4 per cent is actually much worse

106: than negative 0.2 or negative 0.3 per cent

110: from the bank's perspective.

112: So they'd much rather put it in these bunds than with the ECB.

116: And this is actually by design.

117: The ECB wants banks to invest their capital out

121: into the economy rather than just sitting on the cash.

125: Now here's a second reason that some investors

127: might want to buy these bunds.

129: It's because they're safe and they're liquid.

131: So the German government is considered a reliable borrower,

135: making their bonds safe.

137: They also can be traded on the secondary market

140: relatively quickly, which makes them liquid.

143: If the eurozone economy goes down,

145: then assets like equity or corporate debt,

148: they're going to perform much worse

151: than these German bunds will.

153: So even though there's negative yield,

155: it's a price investors are willing to pay for that safety

159: and liquidity.

160: Now here's a third reason why someone

162: might want to buy these negative yielding bunds.

166: The ECB has recently signalled that it may want

169: to buy more sovereign debt.

171: That would push up the price of these German bunds.

175: So if you're an investor and you think the price of something

177: is going to go up in the future, you

180: may buy it now so that you can sell it later,

182: making yourself a little profit.

185: So these are just some of the reasons

187: why people may want to buy German bunds,

189: even though they have a negative yield.

191: But it's not all of the reasons.

193: In general it's important to know

194: that even though on its surface it

196: may seem silly to buy a negative yielding asset,

199: there are some reasons why it actually makes sense,

201: even though right now it essentially looks

205: like a guaranteed loss.