That explains the ECB, but why are investors buying these bonds? According to John Ainger in Bloomberg:
"Investors are willing to pay a premium -- and ultimately take a loss -- because they need the reliability and liquidity that the government and high-quality corporate bonds provide. Large investors such as pension funds, insurers, and financial institutions may have few other safe places to store their wealth."
In short, they are captive buyers. Banks are required to hold government securities or other "high-quality liquid assets" under capital rules imposed by the Financial Stability Board in Switzerland. Since EU banks now must pay the ECB to hold their bank reserves, they may as well hold negative-yielding sovereign debt, which they may be able to sell at a profit if rates drop even further.
Wolf Richter comments:
"Investors who buy these bonds hope that central banks will take them off their hands at even lower yields (and higher prices). No one is buying a negative yielding long-term bond to hold it to maturity.
"Well, I say that, but these are professional money managers who buy such instruments, or who have to buy them due to their asset allocation and fiduciary requirements, and they don't really care. It's other people's money, and they're going to change jobs or get promoted or start a restaurant or something, and they're out of there in a couple of years. Après moi le de'luge."
Why the U.S. Can't Go Negative, and What It Can Do Instead
The U.S. doesn't need negative interest rates, because it doesn't have the EU's problems but it does have other problems unique to the U.S. dollar that could spell disaster if negative rates were enforced.
First is the massive market for money market funds, which are more important to daily market functioning in the U.S. than in Europe and Japan. If interest rates go negative, the funds could see large-scale outflows, which could disrupt short-term funding for businesses, banks and perhaps even the Treasury. Consumers could also face new charges to make up for bank losses.
Second, the U.S. dollar is inextricably tied up with the market for interest rate derivatives, which is currently valued at over $500 trillion. As proprietary analyst Rob Kirby explains, the economy would crash if interest rates went negative, because the banks holding the fixed-rate side of the swaps would have to pay the floating-rate side as well. The derivatives market would go down like a stack of dominoes and take the U.S. economy with it.
Perhaps in tacit acknowledgment of those problems, Fed Chairman Jay Powell responded to a question about negative interest rates on Sept. 18:
"Negative interest rates [are] something that we looked at during the financial crisis and chose not to do. After we got to the effective lower bound [near-zero effective federal funds rate], we chose to do a lot of aggressive forward guidance and also large-scale asset purchases. ...
"And if we were to find ourselves at some future date again at the effective lower bound -- not something we are expecting -- then I think we would look at using large-scale asset purchases and forward guidance.
"I do not think we'd be looking at using negative rates."
Assuming the large-scale asset purchases made at some future date were of federal securities, the federal government would be financing its debt virtually interest-free, since the Fed returns its profits to the Treasury after deducting its costs. And if the bonds were rolled over when due and held by the Fed indefinitely, the money could be had not only interest-free but debt-free. That is not radical theory but is what is actually happening with the Fed's bond purchases in its earlier QE. When it tried to unwind those purchases last fall, the result was a stock market crisis. The Fed is learning that QE is a one-way street.
The problem under existing law is that neither the president nor Congress has control over whether the "independent" Fed buys federal securities. But if Trump can't get Powell to agree over lunch to these arrangements, Congress could amend the Federal Reserve Act to require the Fed to work with Congress to coordinate fiscal and monetary policy. This is what Japan's banking law requires, and it has been very successful under Prime Minister Shinzō Abe and "Abenomics." It is also what a team of former central bankers led by Philipp Hildebrand proposed in conjunction with last month's Jackson Hole meeting of central bankers, after acknowledging the central bankers' usual tools weren't working. Under their proposal, central bank technocrats would be in charge of allocating the funds, but better would be the Japanese model, which leaves the federal government in control of allocating fiscal policy funds.
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