Negative yield bonds

Negative yield bonds may be defined as debt instruments, which offer to pay maturity amount less than the purchase price of the bond. These are issued by governments and central banks.

China’s Negative Yield Bonds

  • China sold negative-yield debt securities for the first time, last week amidst a high demand from European investors, as the bond yields in Europe are even lower.
  • The deal was worth 4-billion-euro bonds with three varying maturity bonds. Among the three categories, the 5-year bond was priced with a yield of –0.152%. The 10-year and 15-year securities had positive yields less than 1 per cent.
  • A reason for the high demand of China’s bonds is the consistency of the country in GDP amidst the Covid-19 crisis. When major countries face contraction, China witnessed a positive growth, even expansion of 4.9 % in Q3.
  • Investors are also looking forward to increase their exposure to China so the negative yield bonds of the country are in demand.
  • Even if fresh lockdown is imposed, China has proved to be stable and will be relatively safer than other countries.

Why do investors buy Negative Yield Bonds?

Preventing Capital Deterioration- During tensions and uncertainty, investors tend to buy negative yielding bonds for protecting their capital from deterioration.  In times of crisis like COVID-19, investors want to keep their capital protected.

Asset Allocation- Many firms managing mutual funds use it for asset allocation. As per asset allocation, some portion of the investment must be allocated to bonds in order to create a diverse portfolio.

Some investors also keep bonds as collaterals, so they have to buy them.

Factors for the high demand of these bonds

In the present scenario after COVID-19, central banks of the countries have injected a massive amount of liquidity accounting to more than $10 trillion and that has resulted in the rise of prices of assets like debts, equities and commodities.  If the fresh wave of COVID-19 leads to more negative interest rates, investment in negative yield bonds can attract profit.

Written by IAS POINT

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