Why are some government bonds negative?

Government bonds have only become negative in recent years, and we partially explain this by adapting our standard demand-supply diagram. Unlike in a normal market, government bonds are not valued by price, but rather by interest rates, so they are our vertical axis (see diagram). The government supplies these bonds, and sets the amount they issue years in advance. This means that the supply of bonds is perfectly inelastic in the short-term and can be represented by a vertical line (see diagram). Investors demand these bonds, and demand more of them if interest rates are higher because they get a greater return on their investment. This is represented by a positively sloped line (see diagram). In recent years central banks have started buying government bonds in order stimulate the economy. The result is an increase in demand, represented by a shift to the right in the demand curve (see diagram). This creates a new equilibrium with a lower interest rate.But while this explains why interest rates are decreasing, it does not explain why they have become negative, for surely investors would just leave their money under their beds rather than loose money? This used to be the case, but recently government across the world have created laws banning large cash transactions and fining banks for not investing their money. This means that it is no longer an option to hold onto your money, and in these circumstances negative interest have become feasible. Therefore, central banks buying government bonds have pushed down interest rates, and the digitisation of money have allowed them to become negative.

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Answered by Tristan O. Economics tutor

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