How is negative yield possible?

Discussion in 'Fixed Income' started by TimtheEnchanter, Dec 22, 2020.

  1. I am confused. You buy a bond with a certain coupon, either with a discount or premium. Upon maturity, you receive the face value of the bond and coupon. When can it be negative? Only if you sell... OK, with an ETF, I can see paying for ETF/yield and ETF goes down more than the yield cover, but how is that possible with a high yield bond?
    bluelou and murray t turtle like this.
  2. Bomp


    lets say you buy a bond maturing in 1yr with a coupon of 10% and you pay a price of 111.00. You pay 111 for the bond and receive 110 at maturity. Voila negative yield.
    MoreLeverage and tommcginnis like this.
  3. Why would anyone do that? Answer is simple, use the math.
  4. Bomp


    Ask all those Bund practical terms you may rationally buy a negative nominally yielding bond if its real yield is positive, i.e. deflation, or if you expect to sell it before maturity at a higher price.
    tommcginnis likes this.
  5. tommcginnis


    You have two choices -- there is
    A) ____________________
    and there is
    B) "A kick in the nuts."

    If you *willingly* choose a kick in the nuts, what does that tell you about choice A? :confused:
    "Answer is simple, use the math." :wtf:
    Indeed. :cool:
  6. Positive carry
  7. %%
    Several reasons.[1]Some think bonds are an important part of investment\so focused on risk, may lose less than stocks. So they dont care about buyer beware.
    [2]Even with negative yield, read WFC, related , US bond fund managers earned an additional 3%, annualized,on negative yield bonds/currency hedging.
    [3] This #3 may not be the best choice of words/LOL. BUT bag holders that bought 10 year German gov bonds with a negative 0.26% yield , JULY example, did fine , because bonds increased 4%.......
    US insurance annuities can do much worse than that negative yield/counting fine print\prepay penalties.
  8. piezoe


    Nominal, negative yields are a tool of central banks that charge a fee on excess reserve balances. So far anyway, you are unlikely to encounter bonds with a negative nominal yield (I think). Germany sold 30 yr bonds at a zero coupon rate in 2019. They sold initially, I believe , at slightly above their face value; thus assuring a negative real yield if held to maturity and there is no net deflation. Apparently investors were anticipating a further drop in interest rates.
  9. bluelou


    The way I understand it sovereign debt with negative yields is held for its risk-weighting and then it's rehypothecated. Note, I'm not an expert in the area, but there seems to be plenty of research on the topic. Here's a BIS working paper that might help. Also see the many papers, presentations and books by Singh.
    Last edited: Jan 25, 2021 at 2:20 PM
    TimtheEnchanter likes this.