What is negative bond yield?
A negative bond yield is an unusual situation in which issuers of paid borrow. At the same time, bond depositors or buyers pay cash flow instead of receiving interest income.
Understanding the negative bond yield
Bonds traded on the open market can actually generate a negative bond yield if the bond price trades with a sufficient premium. Remember that bond prices change inversely with the yield on a bond, the higher the price of a bond, the lower the yield. At any given time, the price of a bond may rise enough to imply a negative return for the buyer.
Reasons Investors Buy Negative Yield Bonds
It was estimated in 2020 that up to 30% of the global government bond market as well as some corporate bonds traded on a negative yield. Some of the reasons why investors might be interested in these negative yield bonds include investors such as central banks, insurance companies and pension funds, who must hold bonds even if the financial return is negative. This is to meet their liquidity needs, and when borrowing, they can also give as collateral.
Another reason is that some investors think they can still make money even with negative returns. For example, foreign investors may believe that the currency will rise, which would offset the negative bond yield. At the national level, investors could expect a period of deflation, which would allow them to earn money by using their savings to buy more goods and services.
Finally, investors may be interested in negative bond yields if the loss is less than it would be elsewhere.
Fewer negative yield bonds
In 2020, sub-zero yields fell to $ 7.3 trillion, indicating higher growth and inflation. Rates have normalized due to rising inflation expectations and factories trying to keep up with demand around the world. As a result, up to $ 1 trillion in bonds left the negative yield area this year.