Nearly a third of the global sovereign debt market carries a negative yield. Most, but not all, is in Europe. When yields are negative, bondholders do not receive a coupon payment, but pay to own these bonds. This unique environment prompts several important questions.
What causes negative bond yields? Why purchase a bond with a negative yield? Do negative yields portend an ominous future? To help answer these and other questions, I spoke with Strider Elass, Senior Economist with First Trust Portfolios L.P.
Mike Patton: What caused bond yields to turn negative?
Strider Elass: It may be traced to the negative interest rate policies adopted by various central banks. Additionally, in the post-2008 crisis world, many countries believed the way to fix their economies is by lowering rates even further to jump start investment and essentially force banks to lend, yet most of these economies continue to struggle. What ails these economies is not a lack of money, but poor fiscal policies, including high taxes, over-regulation, and high government spending. Yet, nothing is being addressed on the fiscal side. I believe Denmark was the first country to go negative (2012). Much of the rest of Europe followed suite in 2014. Japan’s bond yields turned negative the same year.
Mike: Why would anyone purchase bonds with a negative yield since there is no regular coupon payment?
Strider: It baffles me. Since there is no regular coupon payment, the investor can only make money if the price rises above what they paid for the bond. If investors believe economic conditions will deteriorate further, they will invest more money in these “safe” securities and prices will rise further. This would also cause yields to become more negative. In Europe, knowing the ECB will continue to buy, gives many the idea there is a backstop.