LONDON -- The European Central Bank's decision to purchase government debt has reassured investors of the reliability of these assets, sustaining their popularity even as yields fall into negative territory.
Investors would lose money if they hold on to bonds with negative yields until maturity, but many see no other attractive options on the market. Quantitative easing by monetary authorities around the world is also weighing on yields.
The ECB also decided Thursday to keep its deposit rate at negative 0.2%, which means private-sector banks pay a fee to park money at the central bank. The measure is designed to boost lending to businesses, but most financial institutions are hesitant to grant loans amid rising concerns about deflation. Instead, they are using their extra cash to purchase government debt.
Investors are scrambling after these safer assets, particularly in Europe, a development that has caused yields on bonds of major economies to plummet. Swiss sovereign debt with up to 12 years to maturity had negative yields as of Tuesday, according to the Mizuho Research Institute.
The euro depreciated Friday after the ECB's decision. German bonds with up to six years to maturity are now in negative territory, as are Japanese government bonds with up to four years to maturity.
Roughly 3 trillion euros ($3.36 trillion) of bonds with negative yields are being traded around the world, according to calculations by the Royal Bank of Scotland.
ECB President Mario Draghi told the press Thursday that the bank will buy bonds with negative yields. It will purchase debt from eurozone countries based on their contribution to the institution, which means a quarter of the sum will be from Germany. The country could see 10-year sovereign yields go negative as well, says RBS fixed-income strategist Giles Gale.
The trend is a side effect of the easing by the Bank of Japan and the ECB, efforts to push up prices and energize their economies. Investors are expected to stick with government bonds for some time, but many believe funds will ultimately be diverted to riskier assets, such as stocks or corporate bonds.
Investors will eventually start buying safe, high-yielding stocks like they buy bonds, predicts Barnaby Martin at Bank of America Merrill Lynch.