It might be considered absurd, if not for the unprecedented contortions in global financial markets.

Pacific Investment Management Co.’s largest international bond fund and China are piling into negative-yielding Japanese debt, buying securities that pay out less than the purchase price. And there’s a way to turn a tidy profit off the trade.

At the heart of the strategy is the world’s insatiable appetite for dollar assets, which is presenting an opportunity for investors with greenbacks to spare: the chance to pick up extra yield, a luxury in an era of record-low interest rates. For dollar lenders, even three-month Japanese bills, trading at a rate of negative 0.24 percent, offer juicy returns through a swap transaction that locks in exchange rates.

Pimco, which manages $1.51 trillion, is one dollar-rich investor looking to tap into the phenomenon. Its Foreign Bond Fund, which protects against currency swings, added short-dated Japanese government debt this year, data compiled by Bloomberg show. The trade was yielding almost 1.3 percent as of Aug. 19. China’s been another big buyer, accumulating a record amount of bills last quarter, Japanese Ministry of Finance data show.

“We can in some markets buy even negative-yielding assets and hedge them into U.S. dollars to create attractive positive yields,” said Sachin Gupta, who runs the $7.8 billion Pimco fund from Newport Beach, California. Short-dated Japanese debt “is as close to a risk-free instrument as is possible” in the country, and, when held to maturity, the profit is locked in from the start, he said.

Upside Down

The trade shows how negative interest-rate policies outside the U.S. are turning the world’s bond markets upside down by stoking demand for dollar-denominated securities and complicating longstanding investment strategies. The flip side of the opportunity is that global investors fleeing $9 trillion of below-zero sovereign yields need to pay up to protect against currency risk when buying American debt. For Japanese and euro-based asset managers, 10-year Treasuries yield practically nothing after factoring in hedging costs.

The upshot is that those with dollars to lend are the belles of the bond-market ball, and that’s where China may come into play.

For more on the global dollar crunch, click here.

The People’s Bank of China holds $3.2 trillion of currency reserves, the world’s largest hoard, and about 60 percent of that is in dollars. That makes the central bank a strong candidate to enter into this kind of trade.