NEW YORK (MainStreet) — Germany had a historic moment last week, for the first time selling five-year government bonds with a negative yield. Buy these securities paying minus 0.08% and you would end up with less than you started with, an investing strategy that seems, well, upside down.
Why would anyone buy such things? And what does this spotlight on today's low-interest environment mean for ordinary folk trying to safeguard a rainy-day fund or store cash while awaiting an investment opportunity or big purchase?
While a first for Germany, other countries have sold negative yield bonds from time to time. Investors with too much money to keep under a mattress buy such bonds because they're willing to pay a little something for the safety of a government-issued security. Also, there's a chance that what's lost in negative yield can be made up if changing conditions nudge the bond's price upward. If newer bonds had an even bigger negative yield, for instance, demand for older ones might rise, pushing up the price.
To be picky about it, many ordinary investors and savers have effectively lived with negative yields for years, because minuscule savings on bank deposits and money market funds have been more than wiped out by inflation - even though inflation has been low too.
The German bond sale, and recent comments from the Federal Reserve in the U.S., indicate that low interest rates will persist. So what should ordinary savers do with their cash?
An article in The Wall Street Journal points to a few alternatives such as short-term bond funds or corporate funds that buy higher-yielding bonds with more risk, perhaps boosting yield by a percentage point. But that's such a small gain it hardly seems worth the trouble, especially if it comes with the risk of losing principal.