NEGATIVE YIELD BOND

Subject: Economics

Context: 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.

Concept:

• 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%.

What are negative-yield bonds?

• These are debt instruments that offer to pay the investor a maturity amount lower than the purchase price of the bond. These are generally issued by central banks or governments, and investors pay interest to the borrower to keep their money with them.

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 huge demand for Chinese bond?

• 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%.
• In case the fresh wave of the Covid-19 pandemic leads to further lockdowns of economies, then there could be further negative pressure on interest rates, pushing yields down further, and leading to profits even for investors who put in money at the current juncture
• 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 the only country that is set to witness positive growth in these challenging times: its GDP expanded by 4.9% in the third quarter of 2020.