How exactly does negative interest on government bonds work?

If you buy something that's issued above par with no coupon then you're guaranteed a negative return if you hold it to maturity, unless rates fall further and you can sell it to the 'greater fool'.

GAT

 

there is a reason why this doesn't seem logical btw.. because it isn't.. you and Mav are on different pages.. Mav is just saying the bond market value has appreciated on top of the interest rate it pays... "capital appreciation" what your saying about the fed buying bonds and supporting the market is right.. I odon't care if Mav disagrees.. I think the fact that the fed has been changing the market signal for the most basic cost in the economy "interest" is going to cost alot in the long run..

 

NIRP means even more capital appreciation... sovereign bond bubble anyone?

 

Hmmm.

Personally I found it hilarious to be accused of 'not understanding basic financial concepts' particularly pertaining to bond maths.

GAT

(2002-2004 interest rate derivatives trader, barclays capital
2010-2013 Head of fixed income, AHL)

 

best response... factual

 

Hold to maturity? Come on. Treasuries are surrogates for FX and liquidity trades. Don't play stupid. It's unbecoming. I'll say it again, anyone who has been long these zero to low interest debt securities has made an absolute killing both on the back of the strong dollar and the capital appreciation. The liquidity kicker is a bonus.

 

The OP asked how negative interest on government bonds works. I've told him (her?). It's a mathematical fact that if you buy something above par and hold it to maturity you'll get a negative interest rate. I can't understand why me stating this fact this bothers you so much.

This has nothing to do with how you'd trade them, or whether they are likely to go up in value if you buy them now, and sell them before maturity.

You seem to be answering a different question to the one I am. The question isn't "Did bonds go up in the past despite having low interest rates?" (yes, of course) or "Can bonds issued below par and bought with negative yield still go up if I buy them and sell them before maturity?" (yes again) .

I you want my, or someone elses, opinion on "Should I buy Swiss bonds with a negative yield" then start a new thread.

GAT

 

As banks lose money in an NIRP environment, they will be less (not more) likely to lend out. NIRP will end up being deflationary in reality, which is counter intuitive to the theory in practice.

 

Why would they be less likely to lend? As you said that's counterintuitive.

 

The Fed is trying to steepen the yield curve, not flatten it (under NIRP). A steepening curve encourages banks to lend. It's basically free money.