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Buying an investment that is guaranteed to lose money is hardly a recipe for financial success. But that’s the bet that many bond investors have made.

Bonds worth $ 14.8 billion – more than a fifth (21.6%) of debt issued by governments and businesses around the world – are currently trading at negative yields (see table below).

This means that their prices are so high that buyers are guaranteed to get back less than what they paid, through interest and principal repayment, if they hold the bond to maturity.

Negative yielding government bonds were issued by Japan, most of the euro area countries – even Greece which faced a multi-year debt crisis from 2009 – as well as Poland, the Republic Czech Republic, Bulgaria and Romania.

Japan, Germany and France account for more than half of the negative-yielding sovereign debt market (see table below).

Negative yielding debt in the Bloomberg / Barclays Agg index

Creditors are now paying these debtor countries to borrow money in an extraordinary reversal of normal practice.

The US government has so far avoided issuing negative yielding bonds, but some Treasuries have traded below zero. The UK first issued negative yielding government bonds in 2020 with a sale of three-year gilts that sparked strong demand.

Negative bond yields are a direct result of measures taken by central banks to support financial markets during and after the financial crisis that began in 2007. Central banks have lowered interest rates to near zero and launched programs multi-billion dollar asset purchase stimulus that largely focused on buying bonds.

These policies have helped to further propagate negative interest rates in fixed income markets. A significant portion of corporate debt, including that classified as high yield or “junk”, also trades at negative yields although there is an increased risk of default by these issuers. (see table below).

Line graph showing the market value (in billions of dollars) of negative yielding corporate bonds

Market turmoil following the onset of the coronavirus pandemic forced central banks to restart their asset purchase programs last year and the market value of negative yielding bonds has been rising steadily since April 2020.

Pension funds and insurance companies with very long-term liabilities are forced to buy negative yielding bonds for risk management purposes or to cover very long-term liabilities.

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Over the past decade, the growing popularity of fixed income exchange-traded funds, which now control $ 1.3 billion in assets, has also provided a new pool of buyers for yield bonds. negative. ETF managers have limited discretion over the bonds they buy, as third-party index providers are responsible for the rules determining which securities can be included in a passive tracking fund.

Vineer Bhansali, founder and CEO of LongTail Alpha, a California-based investment manager, says the impact of negative bond yields goes far beyond fixed income markets.

“Low yield bonds affect stock markets and possibly create [price] amplification that could lead to more frequent increases and decreases and financial instability, ”he warns.

Ultra-low interest rates have encouraged some companies to step up share buyback programs because it is relatively cheap for them to issue debt and use the money raised to buy their own shares. Share buybacks can increase a company’s earnings per share by reducing the number of shares outstanding. As a result, they may also increase the value of stock options and bonuses paid to senior executives based on EPS performance targets.

Negative yields also fuel the carry trade in the forex markets. Investors in a country with very low or negative yields, such as Japan, can buy bonds sold by a country with higher yields, such as the United States. But this strategy of improving returns also exposes them to currency fluctuations that could easily wipe out their returns. Analysts warn that the move away from negative bond yields could cause significant disruption.

The Federal Reserve’s announcement in 2013 of its intention to cut its asset purchase program led to a surge in US Treasury yields and a fall in stock prices – an episode known as ‘taper tantrum’ .

Investors are now bracing for a possible repeat, with the Fed making it clear this month that the decision to cut the asset purchase program by $ 120 billion per month would be announced at its next meeting in November.


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