“What does this mean? Does a negative yield mean a Treasury Inflation-Protected Securities holder has to pay to own the security? In a way, yes. It means if you buy TIPs here you are essentially paying the government to do so because the yield is less than the Treasury equivalent.

Now why would anyone do that? Because TIPs are designed to provide protection against inflation. Investors can still earn money from TIPS with sub-zero rates because the principal rises with the CPI. TIPs pay interest twice a year at a fixed rate and that rate is applied to the adjusted principal; so, like the principal, interest payments rise with inflation and fall with deflation.

When TIPS mature an investor is paid the adjusted principal or original principal, whichever is greater. What the current negative yield situation means is that investors believe headline inflation is going to remain elevated and are willing to give up the real yield for the inflation-adjusted return of principal.”

The -0.72% TIP rate would translate into a 3.56% yield (if I understand how the rate is calculated; CPI was 4.28% for January…).

So even though they are accepting less than inflation, buyers would triple their return.

Very interesting…