Hi,

You are right to point out that the bond with negative yield will earn capital gains if the interest rate decreases further (required yield turning more negative). But isn't it that the capital gains (present value of the cash of $1000 to be spent after two years) from holding the cash will always outperform investment into negative return yielding bonds?

My view also matches with macroeconomics view that the central banks runs out of tools in deflation as it can't lower nominal rates less than 0%.

According to my working*, outperformance of holding cash rather than investing in bond yielding -0.12% ranges from $0.57 to $2.73 depending upon after how many periods, the interest changes. I have expected the future changes in interest rates to be -10% and +10% (range mentioned in the original worksheet).

So, I think that ignoring the future capital gains from appreciated exchange rate, the bonds will not have negative yield. Currently, investors expect that Germany’s currency will appreciate significantly in the event Euro Zone falling apart. This may be the reason that investors are willing to purchase negative yielding bonds issued by Germany.

Please help me with this and provide me your email id so that I can share my working with you.

* I am assuming no cost of holding cash for two years and I have calculated the present value of $1000 using required yield. No intermediate cash-flow is considered.