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?
     
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  2. Bomp

    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.
     
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  3. Why would anyone do that? Answer is simple, use the math.
     
  4. Bomp

    Bomp

    Ask all those Bund buyers.....in 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

    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

    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.
     
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  9. bluelou

    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. https://www.bis.org/publ/work561.pdf
     
    Last edited: Jan 25, 2021
    TimtheEnchanter likes this.
  10. destriero

    destriero

    Most traders on here produce a negative yield.
     
    #10     Feb 16, 2021
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