Negative Bond Yield
By James Chen
What Is Negative Bond Yield?
A negative bond yield is an unusual situation in which issuers of debt are paid to borrow. At the same time, depositors, or buyers of bonds, pay a cash flow instead of receiving interest income.
Understanding Negative Bond Yield
Bonds trading in the open market can effectively carry a negative bond yield if the price of the bond trades at a sufficient premium. Remembering that the prices of bonds change inversely with a bond's yield, the higher the price of a bond, the lower the yield. At some point, the price of a bond can increase sufficiently to imply a negative yield for the purchaser.
Reasons Investors Buy Negative Yielding Bonds
It was estimated in 2016, that as much as 30% of the global government bond market as well as some corporate bonds, was trading on a negative yield. Some of the reasons investors might be interested in these negative-yielding bonds include those investors such as central banks, insurance companies and pension funds, who have to own bonds, even if the financial return is negative. This is to meet their liquidity requirement, and when borrowing, they can also pledge as collateral.
Another reason is that some investors believe they can still make money even with negative yields. For example, foreign investors might believe the currency will rise, which would offset the negative bond yield. Domestically, investors might expect a period of deflation, which would allow them to make money by using their savings to buy more goods and services.