Negative Bond Yield Explained

What is Negative Bond Yield

Negative bond yield is when an investor purchased a bond and held it until the maturity date and end up with receives less money than the principal. To put this simply, the negative bond yield happens when the investor buys a bond in the secondary market at a higher price than the face value and then held it until maturity.

However, the negative yield bonds are not issued with a negative coupon rate (interest rate of the bond) at the beginning. The negative bond yield can occur with any coupon rate when the bond had selling at a higher price than face value.

If you buy a 3-year Treasury for $2,100 when its par value is $2,000 and this bond has no coupon payment (no interest rate). In case you hold this bond until maturity you will receive $2,000 (not $2,100), this is how a negative bond yield work.

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Key Points

• Negative bond yield occurs when an investor buys a bond with a higher price than face value and held it to the maturity date.
• The negative bond yield causes the investor receives less money (than the principal) at maturity.

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Why Buy Negative Yield Bonds

The investor that invested in the negative yield bonds can be categorized into 3 groups: forced buyers, safe haven, and speculators.

Forced buyers are investors that must hold the bond for some reason other than making a profit. Normally, they are include:

• The central bank such as ECB, BoJ, and Fed during the QE or YCC policy.
• Financial institutions the required to hold high-quality bonds to meet the requirements set by regulators such as insurance companies and pension funds.

Speculators are investors (or traders) who purchase the negative-yielding bonds for short periods of time in order to profit from changes in the bonds’ price, rather than hold the bond to maturity.

The last group is the investors who buy the negative yield bonds is the investor that purchases the negative yield bond as a safe-haven asset during the uncertain environment. This is because buying a negative yield bond is might be far less of a loss than holding cash.