In this Money Matters, Time Warner Cable News’ Tara Lynn Wagner look at negative yield bonds and why anyone would want to invest in something they know won't make any money.
Let's talk about bonds. Think of a bond as an IOU.
"So an investor in a bond is effectively a lender and the issuer of the bond is borrowing money and typically when you have an IOU, you lend money to somebody and you expect to get your money back plus some interest thereon,” says Martin Small, a managing director at BlackRock.
But that's not always the case. In fact Small says across Western Europe and Japan, most of the bonds are in negative yield.
"That is, you lend money to someone and you get less back than what you lend. So for example, you might buy a bond for $100 and get $99 back,” he says.
That doesn't sound like such a great deal, so why would anyone want in on it? Small says there several reasons but the first and foremost is fear.
"Markets are pretty volatile so you might lose money in equities,” Small says. “You might lose money in real estate. So the idea of being able to put your money into something that will only suffer a reasonable loss. It is like the cost of storage, right? That's what drives a lot of investors to negative yields."
Again, this is primarily seen in international markets. Small does not think we are in danger of entering negative territory in the US bond market any time soon, but he also says the days of double digit interest rates are long gone.
Still, even with lower returns, when it comes to long term goals, he says the most important thing is to get invested and stay that way.
"Own stocks, own bonds as diversification for your equity portfolio and when markets turn a little bit, don't get uninvested,” Small says. “Stick with your plan. That's really the way you're going to build wealth over time."