What is a Negative Bond Yield ? | UPSC

What is a Negative Bond Yield ? | UPSC

      HEADLINES:

Why China’s negative yield bonds are in demand

      WHY IN NEWS:

At a time when the world is battling the Covid-19 pandemic and interest rates in developed markets across Europe are much lower, investors are looking for relatively better-yielding debt instruments to safeguard their interests.

SYLLABUS COVERED: GS 3:Economy : Markets : Bonds

      ISSUE: 

China’s 5-year bond was priced with a yield of –0.152%, and the 10-year and 15-year securities with positive yields of 0.318% and 0.664%.

NEGATIVE BOND YIELD

China sold negative-yield debt for the first time, and this saw a high demand from investors across Europe.

  • As yields in Europe are even lower, there was a huge demand for the 4-billion-euro bonds issued by China.

WHY DO INVESTORS BUY THEM?

  • Negative-yield bonds attract investments during times of stress and uncertainty as investors look to protect their capital from significant erosion.

At a time when the world is battling the Covid-19 pandemic and interest rates in developed markets across Europe are much lower.

  • Investors are looking for relatively better-yielding debt instruments to safeguard their interests.

WHY IS THERE A HUGE DEMAND?

  • The fact that the 10-year and 15-year bonds are offering positive returns is a big attraction at a time when interest rates in Europe have dropped significantly.

As against minus —0.15% yield on the 5-year bond issued by China, the yields offered in safe European bonds are much lower, between –0.5% and —0.75%.

  • Also, it is important to note that while the majority of the large economies are facing a contraction in their GDP for 2020-21.
  • China is one country that is set to witness positive growth in these challenging times: its GDP expanded by 4.9% in the third quarter of 2020.

      IASbhai WINDUP: 

KEY FACTOR DRIVING THIS DEMAND

  • It is the massive amount of liquidity injected by the global central banks after the pandemic began .
  • This has driven up prices of various assets including equities, debt and commodities.

Many investors could also be temporarily parking money in negative-yielding government debt for the purpose of hedging their risk portfolio in equities.

  • Global central banks have injected an estimated more than $10 trillion of liquidity through various instruments in the financial system.
  • This is expected to lead to volatility in the financial markets in coming days, pushing up demand for safety of capital alongside flows into risk assets.
  • Institutional investors would look at the overall returns after factoring in the sharp gains from equities and commodities .
     SOURCES:   IE  | What is a Negative Bond Yield ? | UPSC

 

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