Negative yields, but positive carry. Via Bloomberg
I came across this interesting article via Bloomberg on the 'mystery of negative-yield allure'. The 'mystery' is basically this, 'why would investors basically pay various governments to look after their own funds? On the face of it, it appears to defy commons sense. Why, O why, would you a buy a negative yielding bond?' It sounds like madness? Wouldn't it be better to bury it in the garden?
The answer is that they offer more carry than 'high-yielding' US treasury bonds. Here is the logic:
'For cash investors, 10 year Treasuries appear to offer a tasty 250bp premium to Bunds. And if you're happy to take the currency risk, that's the case. But if you do want to hedge the currency, something crazy happens. Because the rate differential between the US and Europe for a three-month FX forward is roughly 3% , all of a sudden those Treasuries have a -0.5% yield for European investors...and those Bunds offer 3% to American ones. Is it any wonder that the money is following the higher all-in yield'
There is another consideration that Bloomberg mentions, namely the finance of long bond positions via the repo market. In the case of the Treasury market, due to the low level of yields relative to repo and the inversion at the the front end, you need to go the seven year bond in order to avoid paying to actually have your position.
Look at the German carry and chart below. The Bloomberg article explains that yes, the ECB depo rate is negative, but the repo rate is down to similar levels which makes it super cheap for a leveraged investor to borrow to buy bonds, making even those bonds with a negative yield attarctive. The two yer Schatz looks unattractive, but the rest of the bonds give positive carry/roll properties.
So, in short, investors are not mad for seeking negative yields. For leveraged investors those negative yields can generate positive carry. Mystery solved.