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Negative Bond Yield

Candlefocus Editor

Negative bond yields are becoming more common as global economies languish and financial markets remain under pressure. Put simply, a negative bond yield occurs when the coupon rate or interest rate paid by the bond, plus the return at the bond's maturity, is lower than the original purchase price. When the yield of an asset falls below the initial purchase price, it becomes a negative yield bond. This means that the investor loses money when the bond matures, even if the coupon rate is considered.

Negative-yielding bonds can be found across several global markets, including the U.S., UK, Canada, and Europe. Japan is one of the most notable countries with negative-yielding bonds; by 2020, over 45% of Japanese bonds had a negative yield. The most common type of negative-yielding bond is a government bond, whereby the government sells bonds and offers a guaranteed rate of return.

Investors may choose to purchase negative-yielding bonds for a variety of reasons. Negative-yielding bonds have recently become a popular safe-haven asset. When stock markets are volatile and investors are uncertain about the future direction of the markets, they may seek the safety of bonds with negative yields. Furthermore, pension and hedge fund managers may invest in negative-yielding assets as part of their asset allocations schemes.

Finally, central banks have been increasingly supporting asset markets by artificially keeping bond yields below zero through quantitative easing programs. This can lead to a situation where investors are willing to pay slightly more for negative-yielding bonds even when they know they will get less money at maturity.

In conclusion, a negative bond yield signifies a troubling macroeconomic environment and can be a popular safe-haven asset for investors. While negative yields almost always result in a net loss for investors, a small loss is sometimes preferred to the volatility and uncertainty of other asset classes.

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