I see presently that many countries outside the U.S. have negative rate government bonds. So you buy one for $101 and in 5 years you get $100 back (face value). (I picked numbers for simplicity).
I understand the bond would be more difficult for someone to steal and cash; but that does not seem a large value. If you just hold cash you can use it at anytime. There is no inflation protection.
What am I missing?
If we exclude speculation about future value, there's one rather simple reason to buy such a bond:
If you're looking for a safe way to store a lot of money, this is in fact the cheapest option.
Let's assume you're a bank with a lot of money that your customers gave you. This money must be stored somewhere. Of course you can lend it to other customers charging an interest rate which is basically how banks earn (a part of their) money. However, there's always a risk associated with that so that's not an option for all the money you get. Remember, it's not your money and there're laws on what you can and can't do with it!
Next thing you could do is deposit any leftover money at the European Central Bank. There's no risk, but the ECB will take a fee of I think 0.4% p.a. at the moment, which is quite a lot.
You may think of storing all that money in cash, but I think it's rather obvious that handling and storing millions or even billions in cash will cost something.
Finally, you may lend your money to a country like Germany which is considered quite safe, too, but only costs about 0.1% p.a.
Why would one buy a bond with a negative rate?
Buying a bond with a negative redemption yield can be profitable in real terms in a period deflation. If deflation sends prices down by 4% and you receive back 99% of your money, then in "real terms" you are up (about) 3%.
Compare this to buying a bond with a positive redemption yield, buy whose yield is insufficient to account for inflation. Here, upon redemption, you will have lost money in "real terms".
So it would make sense to buy bonds with negative redemption yields if you anticipate an extended period of deflation.
Because you expect to sell the bond at $102 as soon as possible
who cares about what happens in 5 years
