Germans rush to buy bonds in failing bank where they will eventually lose money

One of the biggest mantras on Wall Street over the past five years has been the need to 'chase yield' in investments and strategies.  But with nearly a decade of global zirp, and the new paradigm of moving into negative interest rates, how logical is it for anyone to purchase assets where over their maturity you will end up losing money, rather than gaining interest?

Welcome to the new norm, and the new global financial system.

States like Japan, Switzerland, and even Sweden have already moved fully into negative interest rates, with the ECB now standing on the cusp of this policy as on Thursday Mario Draghi removed the final 5 bps barrier to now have the central bank sitting exactly at zero.  But of an even more disturbing note, nearly half (40%) of all European sovereign bonds are themselves negative, meaning that banks and investors who are buying these instruments are doing so with the knowledge they will lose money simply for holding them.

Negative Interest Rates

Negative Interest Rates

On March 10, we have now even discovered that Europe's strongest economy is no longer immune to this as a formerly bailed out German bank is floating new bonds to stave off insolvency, and they are issuing them with negative rates.

And investors are actually buying them!

It really does feel like going back in time.

This feeling was only reinforced when I whipped out my phone and saw that German bank Berlin Hyp had just issued 500 million euros worth of debt… at negative interest.

I wondered if I really did go through a time warp, because this is exactly the same madness we saw ten years ago during the housing bubble and the subsequent financial crisis.

To explain the deal, Berlin Hyp issued bonds that yield negative 0.162% and pay no coupon.

This means that if you buy €1,000 worth of bonds, you will receive €998.38 when they mature in three years.

Granted this is a fairly small loss, but it is still a loss. And a guaranteed one.

This is supposed to be an investment… an investment, by-the-way, with a bank that almost went under in the last financial crisis.

It took a €500 billion bail-out by the German government to save its banking system.

Eight years later, people are buying this “investment” that guarantees that they will lose money.

The bank is now effectively being paid to borrow money.
— Sovereign Man

The leading question one has to ask themselves is how exactly did we get to this position?  After five years of cheap borrowing rates coupled with tens of trillions of dollars, euros, yen, and yuan being funneled to the banks and into the banking system, how could these institutions possibly be insolvent unless the law of unintended consequences has been proven to be more powerful than man's arrogance to believe they can control forever the laws of nature when it comes to things like debt and compound interest.

As Will Rogers once said, it is not return on investment that he was worried about, but rather return OF his investment.  And today in the global financial system all things are screaming that there are no more promises of a return of your money if you invest in any paper asset, and that the cycle is instead signalling to people to hunker down in assets are completely out of the system, and that have no counter-party risks.