0: Hello.

1: I'm here to make you an offer.

3: You lend me £100.

5: And I will pay you back £90 in 10 years' time.

9: So yes.

10: You lose £10 on my offer.

12: It doesn't sound like a good investment at all, does it?

15: But this type of arrangement has become strangely normal

18: in the markets, particularly in Japan and Europe.

22: So how did things get so topsy turvy?

25: Let's start with the basics.

27: When companies or governments need to raise money

30: they have two options.

31: Governments can issue bonds.

33: And companies can - on top of that

35: - also issue shares to investors.

38: But what we're interested in are bonds.

40: They're a form of debt that can last over

42: different periods of time, from a few weeks to several decades.

47: And unless something goes seriously wrong,

49: you will get the full amount that you have invested.

52: So this is how it works.

54: The issuers of the bonds will make regular interest payments

58: to those that hold them over their lifespan.

61: This fixed rate of return investors

63: receive on a bond is called the coupon.

66: On top of this, there's an extra component,

68: this payment - as a proportion of the price

70: - is called the yield.

72: It's the price of the bond changes so does the yield.

78: The lower the price goes, the higher the yield rises.

82: And the higher the price goes, the lower the yield falls.

86: You get the idea.

88: Now a negative yield is the opposite.

90: It means investors are receiving less money than they originally

93: paid.

94: And what is so topsy turvy in the markets today

97: is that roughly a fifth of the global bond market

100: now trades at negative yields.

103: So why is this happening?

105: Let's go back a bit.

107: In the last decade or so, developed economies

109: have suffered from low growth and low inflation.

112: So to encourage people to spend more money,

114: central banks have been reducing interest rates

117: and injecting money into the economy

119: through quantitative easing, or QE,

122: to make individuals like us less motivated to keep money stored

125: in our bank accounts and instead spend it or put it

129: in riskier assets.

131: And the same is applied to the banks.

134: The European Central Bank, for example,

136: now charges other European banks nearly half a per cent interest

141: to hold their money in their deposits.

143: Because it wants banks to lend their capital out

146: into the economy rather than just sitting on the couch.

151: So far we've been talking about ordinary people

153: like you and me.

154: Now let's move on to investors, a particular subset

157: - investors with loads of money to spend.

161: If you were one of these investors surveying

163: the markets right now, this is what you'd see.

166: Bond prices have been skyrocketing.

169: And that's happening because investors still

172: see bonds as some of the safest assets

175: when the economic outlook is poor.

177: And so they have been buying them, as well as central banks.

181: And as the bonds get more expensive,

184: the returns become much lower.

187: The prices are now so high the yields in a number of countries

191: - such as Austria, Belgium, Denmark, Finland, France,

195: Germany, Japan, the Netherlands, and Switzerland

198: - have gone below zero.

200: So investors are certain to get back less than they

203: paid if they hold the bond to maturity.

207: So why hold these bonds at all?

209: In this topsy turvy world, issuers of debt

213: are now being paid to borrow.

214: And the investors, or buyers of bonds,

217: are paying cash to these borrowers, companies,

220: and governments instead of receiving an interest payment.

224: But despite the strange world for investors, as we said,

228: bonds are seen as one of the safest

230: investments on the market.

231: Because their returns have been very reliable

234: they're at the heart of most portfolios.

237: Government bonds, in particular, are considered very safe assets

241: because governments are reliable borrowers.

243: The owners of these bonds, or gilts,

245: can also buy and sell them in what

247: is called a secondary market.

249: This makes these bonds very liquid,

251: to continue the financial jargon.

255: Of course, bonds are only safe investments

258: if their rates are positive and above the rate of inflation.

262: Otherwise, investors won't be earning

264: any money, as is happening with bonds with negative yields.

268: And that has kicked off a very active debate

270: about whether government bonds should be considered

273: as safe havens at all.

275: In fact, some investors are refusing

277: to own negative yielding debts for this reason.

281: But for really big investors - such as banks,

284: insurance companies, and pension funds - they have no choice.

288: They have to own bonds, even if the financial return

291: is negative.

292: This is because they have to make

294: sure their funds are liquid.

295: And when borrowing, they can also

297: pledge bonds as collateral.

300: So this is where we are now.

301: But what next?

303: It depends.

304: If low growth, trade tensions, and political uncertainty

307: continue investors are likely to continue to flock to safer

311: assets, like government bonds, thereby driving up prices

316: and keeping yields on the negative.

319: In fact the volume of negative yielding bonds

322: has started to fall.

323: But some market experts still believe

325: that until at least 2022, about a fifth of sovereign bonds

329: will have a negative yield.

331: But back to you, in this topsy turvy world,

335: how does this affect you?

337: In the short term, it seems that negative yields can actually

339: get the economy moving.

341: But over the long term, negative yields could mean lower returns

345: on pension funds, meaning workers

347: could be forced to save more and work longer.

351: We are already seeing signs of this,

353: especially in eurozone countries where people have become

356: concerned about not receiving positive returns

359: and have started to set more money aside for the future.

363: The central banks believe their strategy can help the economy.

367: But their critics warn that negative yields could slow down

370: the economy even more.

372: And the central banks could find themselves

374: trapped by their own policy of cutting

376: borrowing rates below zero.