Once upon a time, you actually had to pay lenders to borrow money. It was an archaic ritual called "interest"—here's the Wikipedia page if you don't believe me—but it's over now.
In fact, it's the opposite of how things work today, at least in Europe's brave, new, deflationary world. France, Finland, Belgium, Denmark, the Netherlands, and Germany are all getting paid by investors—that is, bond yields are negative—to borrow for up to four, and sometimes six, years. Switzerland is even getting paid to borrow for ten years. That's never happened anywhere before. But it's not just governments that people are paying for the privilege of lending to. It's companies, too. Or at least one of them: Nestlé. Its €500 million debt that comes due in October 2016 became the first corporate bond of a year or longer to have a negative yield, after it got as low as -0.0081 percent on Tuesday. (Its borrowing costs later rose to a, relatively-speaking, punitive -0.002 percent).
That brings us to the obvious question: Why would you ever pay Nestlé, or anyone else for that matter, to borrow money from you? Well, because there's not enough inflation and not enough bonds. This makes more sense if you look at what currency Nestlé is borrowing in: the euro. Prices are falling 0.6 percent in the eurozone right now, so a euro will be worth more tomorrow than today. And that means it can make sense to lend money for nothing or even negative amounts. That's because the euros you'll get paid back with will be worth more than the euros you're paying with right now. So you can lose money but still make money, as long as its value is going up.
But it's a little tricker than this, because bonds aren't just an investment. They're collateral, too. Banks and hedge funds and every other part of the financial system need them for "repo" loans, where you sell a bond for cash and promise to buy it back later with interest. (Hey, it's not a totally dead concept!). Now this is a lot more important than it sounds, and not just because the repo market is huge. Think about it this way. If you can turn a super-safe bond into money whenever you want, then that bond is almost a kind of money itself. And that makes people willing to pay a little extra for it, which pushes its interest rate down even more. The emphasis here, though, is on the word "super-safe." If there's any possibility that a bond won't be paid back, then you won't get as much repo money for it when things look good and you won't be able to get any for it when things look bad.
There's always been a premium, in other words, on government bonds that are good collateral. But it's become a lot more than that lately. It's become a frenzy. Why? Well, there weren't enough of these bonds to begin with, and now there are about to be even fewer. That's because Europe's austerity has already limited the supply of government bonds, since deficits have been smaller, and now the ECB's bond-buying is going to limit it even further—reduce it, actually—by vacuuming up what there is from the private sector. That's why banks that need government bonds have had to turn to the next best thing instead: blue-chip corporate debt. A company like Nestlé isn't quite as safe as a government, but it's pretty damn close—it'd take something like a zombie apocalypse for it to default anytime soon—and that's what matters for repo loans. So negative rates are, in part, about paying whatever price it takes to get your hands on top-rated collateral.
Now this is how quantitative easing is supposed to work, but it wasn't supposed to work this well. It has, though, because QE is a kind of magic. It turns corporate bonds into a kind of money by printing actual money. That, remember, is because buying government bonds with newly-printed money forces banks to use private-sector bonds as collateral instead—which is money-like since you can use it to get cash on demand. And the thing about money? It doesn't pay any interest.
Neither do bonds anymore.