Negative yield bonds: why are they needed and bought?

Negative yield bonds: why are they needed and bought?

Negative yield bonds: why are they needed and bought?

Negative yield bonds are bonds with a yield below zero. Suppose that you went to a bank and made a deposit of $ 10 thousand, a year later you came to the bank for your money. You were given only 9.5 thousand, less than what you initially gave, this is negative profitability. In this case, we talked about deposits, not about buying bonds, but the principle is the same there.


Most bonds assume negative gains (losses). This state of affairs is largely a mistake of central banks, because it was their policy of easing that led to a global reduction in rates, and the government very actively supports such working methods, since lowering interest rates in the country leads to futility savings, forcing capitalists to invest in production rather than in jars for storage.


In fact, negative bond yields are not such a big problem as it might seem, many investors really want to invest in such assets, as this offers them various advantages. In particular, a few examples can be considered:

1. Purchase of bonds with a negative yield to save money and get rid of cash. History shows that when people have money savings, then there are problems not only with rodents, but also with thieves, which leads to additional risk. Of course, after a certain time, the invested amount in the currency of the country with negative bond yield will decrease, but at the same time it will increase in the currency of the investor’s national country, and accordingly will retain its purchasing power.

2. Buying bonds in the hope of deflation. In fact, this approach has already largely established itself in Japan, where negative rates have been around for quite some time. If you look at the inflation rate for many years, that is, for long periods when deflation is observed, that is, an increase in the purchasing power of money, which in fact causes an increase in the yield of bonds with a negative rate. That is, if we invested 10,000 and received 9970 per year (at a rate of -0.3%), but at the same time, the purchasing power of these 9970 increased by 0.5% per year, then in fact we can assume that we received 10019.85.

3. Purchase of bonds with negative yield in foreign currency in the hope of increasing the value of foreign currency. Here, in principle, the approach is exactly the same as with deflation, you can simply consider the difference between the two currencies.

Over time, of course, negative nominal and real returns can encourage investors to save less and spend more. This is the purpose of negative interest rates. In a world where supply exceeds demand and where excess savings are not invested in the economy, a balanced interest rate is low and can even be negative. If century-old stagnation really began in developed countries, a world of negative interest rates on both short-term and long-term bonds may become the new norm.

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