Bond investors in Europe and Japan are losing money to save it

▶ Investors in Europe and Japan are paying up for safety ▶ “At the moment there seem to be few alternatives”

It’s not as if Christoph Kind relishes putting his clients’ money into bonds that pay nothing in interest and can all but guarantee losses. But Kind, the head of allocation at FrankfurtTrust Asset Management in Germany, is doing just that. And he’s hardly the only one.

In Europe and Japan, central banks have set some rates below zero— an idea that’s hard to get one’s head around. But negative yields for bond investors have already become an everyday reality.

Yields fall when bond prices rise. They go negative when the price is higher than all future interest and principal payments. In Germany, surging demand for two-year government debt has pushed yields to -0.53 percent per year, meaning an investment of €10,000 would pay back only €9,894. The average yield on all €1.1 trillion ($1.2 trillion) in German bonds was sub-zero every day for more than two weeks as of Feb. 23. That’s the longest stretch of money-losing rates ever, according to Bank of America. In Japan, bond prices are so high that almost two-thirds of government debt, amounting to $4.5 trillion, has a negative yield, according to data compiled by Bloomberg.

Behind the low rates are fear and growing skepticism that central banks’ dramatic rate cuts will be enough to reignite the global economy. Worries over the economic health of China and the U.S., plus volatility in stocks and oil prices, have many investors looking for safe assets. Even with slightly negative yields, the bonds issued by Germany and Japan at least offer liquidity and the assurance that they won’t default.

“Risk-free now has a cost,” and clients are learning that they should accept it, says Mauro Vittorangeli, a senior fixed-income money manager at Allianz Global Investors, which oversees about $505 billion in assets.

The low rates also suggest markets see little risk of a spike in inflation, which would make holding negative-yielding bonds even more painful— and likely prompt central banks to raise rates and thus make existing bonds less valuable. (Even government bonds that won’t default can lose market value before they mature if rates rise.) A majority of economists in a Bloomberg survey say negative rates will be in place at the European Central Bank at least until the first

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