After the 10-year German bond yields reached a record low yield close to the minus 0.4% on Wednesday, the returns fell to a record low of -0.409% on Thursday. Thus for the first time yield is below the interest rate on European Central Bank deposits of -0.4%.

Negative returns arise from the fact that investors buy German government bonds at a higher price than the amount they get back after maturity, including interest. By moving the threshold of minus 0.4%, investors will soon be cheaper to sell their ten-year bonds and deposit their money in a bank. The bank may deposit the money at the ECB at an interest rate of minus 0.4% and charge those costs to the investor as penalty interest.

However, for 2-year and 5-year German bonds, investors have long been willing to accept a yield below the ECB’s negative interest rate.

There is one main reason for this: the German state is considered to be a very solid debtor. Within the Eurozone, bunds are the safest and easiest to trade securities. This is why investors prefer to give their money to the German government rather than entrusting them to a bank.

In addition, some large investors are forced to buy German government bonds. For example, many pension funds and insurance companies have very strict investment guidelines. They are not allowed to own shares and buy only debt securities from the most stable issuers. In practice, they have no choice but to invest part of their money in the German bonds.