What Is a Negative Bond Yield?

Context

  • Recently, China sold Negative Bond Yield for the first time, and this saw a high demand from investors across Europe.

What Is a Negative Bond Yield?

  • These are debt instruments that offer to pay the investor a maturity amount lower than the purchase price of the bond.

    Negative Bond Yield
    Source: The Economist

  • These are generally issued by central banks or governments, and investors pay interest to the borrower to keep their money with them.

Why do investors buy them?

  • Negative Bond Yield attract investments during times of stress and uncertainty as investors look to protect their capital from significant erosion.

Why is there a huge demand?

  • The fact that the 10-year and 15-year bonds are offering positive returns is a big attraction at a time when interest rates in Europe have dropped significantly.
  • As against minus —0.15% yield on the 5-year bond issued by China, the yields offered in safe European bonds are much lower, between –0.5% and —0.75%.
  • Also, it is important to note that while the majority of the large economies are facing a contraction in their GDP for 2020-21, China is one country that is set to witness positive growth in these challenging times: its GDP expanded by 4.9% in the third quarter of 2020.

What is the key factor driving this demand?

  • It is the massive amount of liquidity injected by the global central banks after the pandemic began that has driven up prices of various assets including equities, debt and commodities.
  • Banking industry sources said many investors could also be temporarily parking money in negative-yielding government debt for the purpose of hedging their risk portfolio in equities.
  • Institutional investors would look at the overall returns after factoring in the sharp gains from equities and commodities and discounting the negative returns on capital being used for the purpose of hedging. 

Source: Indian Express

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