What Are Negative-Yielding Bonds and Why Would Anyone Buy Them?

What Are Negative-Yielding Bonds and Why Would Anyone Buy Them?

Let’s talk about What Are Negative-Yielding Bonds and Why Would Anyone Buy Them?!?

What Is A Negative-Yielding Bond?

A Negative-Yielding Bond means that if you buy this bond, you are guaranteed to make LESS THAN what you paid for the bond when it matures.

For example, if I buy a $100 bond maturing in 1 year yielding 5%, and then I sell it to you for $110, you are going to get $105 when it matures in a year…thus you will lose $5.

I have a positive yielding bond and I sold it to you as a negative yielding bond.

I also made 10% instead of the 5%.

Governments in Japan and in Central Europe have been issuing negative yielding bonds.

Now that you understand what negative-yielding bonds are, let’s talk about why would anyone buy a negative yielding bond?!?

#1 Reason Why Buy a Negative-Yielding Bond – Safe Place To Put Assets Where There Are No Better Alternatives

Lets say the stock market is crashing 50% and the economy is down…hmm, like in March of this year (2020).

You might want to sell your stocks and buy bonds instead.

After all, knowing you will lose 5% may be better than the uncertainty of losing 50% or more in the stock market or wherever else you would put your money.

Bonds have good liquidity (they can be bought and sold easily) and people might not find anything else safer than a government bond.

#2 Reason Why Buy a Negative-Yielding Bond – You Are Betting The Price of The Bonds Will Go Up

If Bonds have negative yields and continue to have even more negative yields, then you can buy a negative-yielding bond today, and later sell it for more than you paid for it.

Thus you could profit from buying negative-yielding bonds and selling them for more than you paid for.

#3 Reason Why Buy a Negative-Yielding Bond – Cross-currency hedging

Taken from Market Watch – “Negative yields don’t mean negative income for some.

Unlike European and Japanese investors, U.S. investors are often paid to hedge against fluctuations of foreign currencies because U.S. interest rates are much higher than in other developed markets like Europe and Japan.

It is why American fund managers can still earn money from holding a negative-yielding European government bond. Currency hedging can provide an additional 3% annualized return for U.S. investors buying euro-denominated debt, according to Jens Vanbrabant, senior portfolio manager at Wells Fargo Asset Management.”

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