Over the past few years, the world has been changing rapidly and in uncomfortable ways. With the controversial Trump presidency in the US and the confused Brexit situation in the UK, people are worried. The wealthy, in particular, are worried about maintaining their resources. Traditionally, banks have paid account holders interest as a reward for depositing their money in the bank. However, today’s panicked public is worried about tariff wars, the falling pound and other considerations. Some people are taking the extraordinary step of paying to keep their money safe.
How exactly does this work? Why would people pay a government to hold their money for them? Well, it all comes down to a negative interest rate. Government bonds are traditionally seen as a very stable investment. Though interest is typically low, the security of this instrument offsets that. Bonds that carry more risk pay higher interest. Bonds that carry low risk pay lower interest. Currently, strong and stable European countries like Germany are paying negative interest rates. So, in effect, investors are paying the German government to hold their money and see that losses stay minimal.
The interest rate for a 10-year bond in Germany is currently hovering around -.65%. Lengthier investments offer small positive returns. For example, the 30-year bond yield is a paltry 0.14%. Investments of this kind have observers worried. Traditionally, when bond yields fall too low, many investors look for greener pastures. The current political uncertainty, however, has made that impossible. What’s more, these bonds are not just being purchased by individuals. Instead, organizations like pension plans are the ones investing in bonds. They are causing a spike in demand that keeps the interest rates exceptionally low.
Large investors like pension plans can’t just put their money into a savings account. The amounts of money involved are too large. If the bank failed, the pension fund would not be insured against a total loss. With an ongoing US-China trade war and an uncertain outlook for British businesses, bonds are the best these institutional investors can do right now. Alternatives like gold are too volatile for them. Pension funds owe it to participants to make sure that in 10, 20 or 30 years, there’s money to be disbursed.