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Buying negative-yield bonds -- or paying for the privilege of loaning money to governments -- looks like a fool's game, but six types of investors have joined the play, JPMorgan said.
A big chunk of the government bond market has gone negative: Around $1.7 trillion of euro-area government bonds with maturities longer than a year are trading with negative nominal yields, JPMorgan estimated in a note last week. That figure rises to $1.8 trillion when adding in the Swedish, Swiss and Danish bonds in negative-land.
Read More Why yields may take another leg down
Two weeks ago, around $1.8 trillion worth of Japanese bonds were trading with a negative yield, although that largely reversed last week, it said. All-in-all, negative yields made up 16 percent of the JPMorgan Global Government Bond Index -- or around $3.6 trillion -- as of two weeks ago, the bank said.
Bond yields move inversely to prices, so when the price rises high enough, investors are paying for the privilege of lending money. It looks like a waste of money, but JPMorgan sees six types of investors going for the trade.
The fear or deflation trader is the first type, as even negative-yield bonds can look attractive if expected deflation turns the real yield -- or the "headline" yield less the decline in prices -- into a gain, it said. This scenario that played out over two decades of deflation in Japan as investors shifted out of property and stocks to go to cash and Japan government bonds (JGBs).
Read More The case for buying negative yield bonds
Others are buying negative yield to make a bet that some currencies, such as the Swiss franc or the Danish krone, will appreciate, JPMorgan said. This has already partly played out in Switzerland, when the Swiss National Bank (SNB) last month surprised markets by terminating the franc's peg to the euro, sending its currency surging by as much as 30 percent initially.
A third type of buyer is just betting the bond price will rise even further, spurred by additional interest rate cuts from central banks or quantitative easing, JPMorgan said, noting many of these investors have already seen strong capital gains. Speculation the Swedish central bank, Riksbank, may cut its rates into negative territory is also driving demand for that country's bonds, the bank said.
Central banks are another big buyer, with the European Central Bank (ECB) already saying its quantitative easing (QE) program will include negative-yield bonds, JPMorgan said. With the ECB using a negative deposit rate to fund its purchases, it may still come out ahead on slightly negative bond yields, it said.
Some investors -- such as index funds -- just don't have a choice, JPMorgan said. It estimated that around $150 billion of $350 billion worth of bond exchange-traded funds (ETFs) invest only in government bonds.
The last group -- financial institutions such as banks and insurers -- may just be making the best of a bad job. Around 220 billion euros worth of reserves at the SNB, ECB and Danish central bank are subject to negative deposit rates, a figure set to rise as the ECB's QE kicks off, JPMorgan noted.
Financial players may be buying negative-yield bonds to get a less negative yield, it said, noting that the SNB's deposit rate is at negative 75 basis points, so anything less negative, such as the negative 67 basis-point yield on the seven-year Swiss bond recently, is the less-expensive evil.
—By CNBC.Com's Leslie Shaffer; Follow her on Twitter