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:
NEGATIVE BOND YIELD
WHAT IS A NEGATIVE BOND YIELD?
- A negative bond yield is when an investor receives less money at the bond’s maturity than the original purchase price for the bond.
- A negative bond yield is an unusual situation in which issuers of debt are paid to borrow.
- In other words, the depositors, or buyers of bonds, are effectively paying the bond issuer a net amount at maturity instead of earning a return through interest income.
- These are generally issued by central banks or governments, and investors pay interest to the borrower to keep their money with them.
KEY TAKEAWAYS
- A negative bond yield is when an investor receives less money at the bond’s maturity than the original purchase price for the bond.
- Negative-yielding bonds are purchased as safe-haven assets in times of turmoil and by pension and hedge fund managers for asset allocation.
CHINESE CASE
- 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.
- 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.
- 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.
- 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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