What’s with the Negative Bond Yields?
Investors generally think of bonds as safe investments that provide a stream of income. It may surprise some to learn that more than one quarter of all government bonds issued globally are trading with negative yields. In monetary terms, that is more than $15 trillion in government debt with a negative yield in addition to more than $1 trillion in negative yielding corporate debt.
This begs two questions:
- How do negative yield bonds work?
- Why would investors buy a bond with a negative yield?
It is important to note that negative yielding bonds do not require investors to make periodic payments to the issuer to continue to hold the bond. Rather, the bonds are purchased at a premium to the par value. For example, an investor may pay more than $100 for a bond with a $100 par value that issues no coupon payments. If that bond is held until maturity, the investor will only receive the $100 par value of the bond even though they paid more than $100 to buy the bond, thus creating a negative yield over the life of the bond.
So why might investors choose to buy a bond with a negative yield? Some of the largest holders of negative yielding bonds are institutional investors, such as pension funds and insurers, with specific requirements about the liquidity and risk of the investments they hold. These restrictions essentially mean they are forced to buy large quantities of bonds regardless of the yield.
Another reason investors may purchase negative yielding bonds is because there is still a potential for positive returns. If rates fall, the price of the bond will rise before it matures, which gives the investor an opportunity to sell the bond and achieve a positive return.
Although negative yielding bonds are seemingly counter‐intuitive, they are simply a function of economic uncertainty and market forces. The good news is that many U.S. Treasuries and other bonds, while near all‐time lows, still have positive yields.
Economic and Market Commentary
Read our latest Economic and Market Commentary for Market Returns Year-To-Date, Market Returns Longer Term Annualized, Economic Indicators, and an Appendix.
Sources: Nasdaq and Bloomberg. This is intended for informational purposes only and should not be construed as legal, investment or financial advice. Please consult your legal, investment and financial professionals regarding your specific circumstances.