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Going Negative?

What's up with negative interest rates?

Temperatures aren't the only thing below zero these days. Around the world bond yields have gone negative. It started a few years ago in the US, when ultra-short Treasury Bills would go negative right around quarter-end. That was understandable as a combination of the Fed's Zero Interest Rate Policy and institutions needing Treasuries for collateral on swap contracts. But a few months ago short rates in Europe went deeply negative-Denmark, Germany, and especially Switzerland. What's going on?

2-year Government Bond Yields as of 2/4/15 (in blue):

Source: Bloomberg

First, the basics: a negative yield means investors will lose money in the local currency if they purchase a bond and hold it to maturity. Why would anyone do this? The key is understanding investors' intentions. Bonds are denominated in a local currency. If that currency appreciates, investors gain relative to other currencies. The negative yields… Read More …