What Is a Negative Bond Yield?
Let me tell you straight up: a negative bond yield happens when you, as an investor, get back less money at the bond's maturity than what you originally paid for it. This is an odd setup where the people issuing the debt actually get paid to borrow money from you.
Put simply, if you're buying these bonds, you're the one handing over a net payment to the issuer at the end, instead of earning interest like you'd expect.
Key Takeaways
Here's what you need to grasp: a negative bond yield means you receive less at maturity than your purchase price. Even if you factor in the coupon or interest payments, a negative-yielding bond still leaves you with a loss at the end. People buy these as safe havens during chaos, or if they're managing pensions or hedge funds for proper asset mix.
Understanding Negative Bond Yields
Bonds are just debt tools that companies and governments use to pull in cash. You buy them at face value, which is your principal investment.
In exchange, you usually get an interest rate—the coupon—for holding onto it. Each bond has a maturity date where you get your principal back.
Bond Value
Once issued, bonds trade on the secondary market, and their prices go up or down based on the economy and money supply. The starting price is often the face value, like $100 or $1,000 per bond.
But the market prices them based on things like economic conditions, bond supply and demand, time to maturity, and the issuer's credit. So, you might not get face value when you sell. Normally, you could buy at $95 and get $100 back—a discount deal. With negative yields, you pay $102 but only get $100, and the coupon might not cover that gap.
Bond Yield
In the open market, bonds can hit negative yields if they trade at a big enough premium. Remember, bond prices and yields move opposite: higher price means lower yield.
This inverse thing comes from bonds having fixed rates. If rates are expected to rise, you might sell to grab higher ones later. If rates will fall, you buy, pushing prices up because those fixed rates look better. Eventually, prices can climb so high that the yield turns negative for new buyers.
Why Investors Buy Negative Yielding Bonds
Central banks, insurers, pension funds, and even regular folks buy these. Reasons vary, but they're practical.
Asset Allocation and Pledged Assets
Hedge funds and mutual funds have rules requiring some bonds in the mix for diversity. This hedges against stock losses, so they hold bonds even if yields are negative. Bonds also get used as collateral for loans, so you keep them no matter the return.
Currency Gain and Deflation Risk
Some think they can profit anyway. Foreign buyers might bet on currency rises to offset the negative yield—convert to buy, convert back to sell, and pocket exchange gains. At home, if deflation hits, your money buys more later, making the negative yield worthwhile.
Safe Haven Assets
In shaky times, bonds are a go-to safe spot. You might take a small negative yield over big stock market drops. Japanese bonds, for instance, often go negative but attract global money as havens.
Example of a Negative Bond Yield
Let me walk you through two bonds to show this. First, Bond ABC: matures in four years, face value $100, 5% coupon, bought at $105.
You paid a premium, but the $5 yearly coupons add up to $20 over four years. Net, you gain $15 after the $5 extra upfront—positive yield.
Now Bond XYZ: same maturity and face, but 0% coupon, bought at $106. No interest, so you lose $6 at maturity. That's a 6% loss, or -1.5% annually over four years—clear negative yield.
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