{"id":2775,"date":"2019-08-27T07:41:52","date_gmt":"2019-08-27T14:41:52","guid":{"rendered":"http:\/\/springwaterwealth.com\/?p=2775"},"modified":"2019-08-27T07:41:52","modified_gmt":"2019-08-27T14:41:52","slug":"is-a-negative-bond-yield-rational","status":"publish","type":"post","link":"https:\/\/springwaterwealth.com\/is-a-negative-bond-yield-rational\/","title":{"rendered":"Is a Negative Bond Yield Rational?"},"content":{"rendered":"

Unless you follow the global capital markets, you\u2019re probably not aware that investors all over the world are currently receiving negative yields on their investments in bonds. In the United States, government agencies and corporations still have to pay a positive rate of interest to borrow money from investors. However, the rate at which they\u2019re able to borrow has dropped steadily. The rate on the 10-year US Government Note is now 1.549%. But Germany just issued a 30-year bond with a negative yield<\/a> last week. The bonds mature in 2050 and pay no interest. Demand was strong and so the offering price for these bonds exceeded their face value. So, in theory, when these bonds mature, investors who bought them when they were issued will receive less than they paid for the bonds. Currently there is $17 trillion of bonds with negative yields<\/a> outstanding globally.<\/p>\n

Why would anyone accept an investment with the possibility of a negative return? Well, they do not expect to lose money.<\/p>\n

What?<\/p>\n

These bonds have negative yields. However, they likely do not have negative returns. There is a difference. Investors will not have negative returns unless those who bought the bonds hold them to maturity and are paid the face value. Then they will have paid more than they received (in interest payments and principal at maturity) and their actual, realized returns will be negative. But that\u2019s probably not what these investors have planned.<\/p>\n

Confused? How about a quick review on how bonds work?<\/p>\n

Let\u2019s take Austria, as real-world example. Two years ago, Austria borrowed \u20ac3.5 billion for 100 years<\/a>. The coupon rate (i.e. the rate of interest Austria will pay investors) was 2.1%. So, on the date the bonds were issued the yield to maturity was also 2.1%. At the outset, investors were willing to receive 2.1% interest on money they loaned Austria and they were willing to do so for a century. In 100 years, they would get their original investment back. This is pretty remarkable.<\/p>\n

However, since then the demand for Austria\u2019s bonds has increased. Investors in the secondary market are now willing to paying more for them than the original investors did when the bonds were first issued. These new buyers will still receive the 2.1% coupon payments. However, because they are paying more than the original face amount for these bonds, their yield to maturity to (i.e. the total amount received by the investor if the bond is held to maturity) is negative. Which means that investors who buy these bonds in the secondary market will receive less than they paid, assuming they hold them to maturity in 2117.<\/p>\n

An astute investor would not willingly accept a negative return. So, we have to conclude that investors who are buying bonds with negative yields are actually expecting that they will be able to sell their bonds.<\/p>\n

Why would they think this? This is the scary part of this story. Bond yields will go lower if investors fear that the global economy will further weaken. When this happens, central banks (e.g. the Federal Reserve, the European Central Bank and the Bank of Japan) will likely reduce interest rates in an attempt to stimulate economic growth. When interest rates drop, bond prices rise.<\/p>\n

So, investors in negative yielding bonds are expecting to make money, not lose it, because they expect the price of the bonds they own will eventually go up.<\/p>\n

PLEASE SEE<\/strong>\u00a0important disclosure information at\u00a0www.springwaterwealth.com\/blog-disclosure\/<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"

Unless you follow the global capital markets, you\u2019re probably not aware that investors all over the world are currently receiving negative yields on their investments in bonds. In the United States, government agencies and corporations still have to pay a positive rate of interest to borrow money from investors. However, the rate at which they\u2019re […]<\/p>\n","protected":false},"author":2,"featured_media":2776,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","_mi_skip_tracking":false,"footnotes":""},"categories":[6],"tags":[21,26,86,87],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/posts\/2775"}],"collection":[{"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/comments?post=2775"}],"version-history":[{"count":0,"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/posts\/2775\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/springwaterwealth.com\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/media?parent=2775"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/categories?post=2775"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/tags?post=2775"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}