European bond markets are in total disarray. We often hear about sky-high yields in countries like Italy and Spain, but countries at the other end of the spectrum are now making headlines.
In places like Switzerland, Denmark and the Netherlands, investors are effectively paying the government to hold their money for two-years because short-term bond yields in these countries, as well as Germany and Finland, are now negative.
Sound crazy? It is. But it’s simply the market demonstrating just how out-of-whack everything is over there. As the Financial Times put it, (registration required) “preservation of capital, not return on capital, is driving bond markets in the so-called core euro zone and beyond.”
But why would anyone actually pay the government to hold their money? Well, there’s the safety factor, which is pretty straight forward.
But there’s likely also a play on currencies involved. Switzerland, for instance, has a separate currency, so even if you get a slightly negative yield, the currency may appreciate relative to the €. If it does, investors make money on the conversion back to the euro.