Explained: What are Negative Bond Yields?

News: The demand for negative yield bonds is on rise in the global market.

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Facts:

  • 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 Negative Yield Bonds?
    • Pledge asset: Bonds are often used to pledge as collateral for financing and as a result need to be held regardless of their price or yield.
    • Currency Gain: Some investors believe they can still make money even with negative yields. For example, foreign investors might believe the currency’s exchange rate will rise, which would offset the negative bond yield.
    • Deflation Risk: Domestically, investors might expect a period of deflation, or lower prices in the economy, which would allow them to make money by using their savings to buy more goods and services.
    • Safe Haven Assets: Investors might also be interested in negative bond yields if the loss is less than it would be with another investment.
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