What is a 'Negative Bond Yield'

A negative bond yield is an unusual situation in which issuers of debt are paid to borrow. At the same time, depositors, or buyers of bonds, pay a cash flow instead of receiving interest income.

BREAKING DOWN 'Negative Bond Yield'

Bonds trading in the open market can effectively carry a negative bond yield if the price of the bond trades at a sufficient premium. Remembering that the prices of bonds change inversely with a bond's yield, the higher the price of a bond, the lower the yield. At some point, the price of a bond can increase sufficiently to imply a negative yield for the purchaser.

Reasons Investors Buy Negative Yielding Bonds

It was estimated in 2016, that as much as 30% of the global government bond market as well as some corporate bonds, was trading on a negative yield. Some of the reasons investors might be interested in these negative yielding bonds include those investors such as central banks, insurance companies and pension funds, who have to own bonds, even if the financial return is negative. This is in order to meet their liquidity requirement and when borrowing, they can also pledge as collateral.

Another reason is that some investors believe they can still make money even with negative yields. For example, foreign investors might believe currency will rise, which would offset the negative bond yield. Domestically, investors might expect a period of deflation which would allow them to make money through using their savings to buy more goods and services.

Finally, investors might be interested in negative bond yields if the loss is less than it would be somewhere else.

Fewer Negative Yielding Bonds

As of 2018, sub-zero yields have decreased to $7.3 trillion, indicating an increase in growth and inflation. Rates have normalized due to rising inflation expectations and factories attempting to keep up with demand worldwide. As a result, as much as $1 trillion in bonds have left the negative yield zone this year.

RELATED TERMS
  1. Bond Yield

    Bond yield is the amount of return an investor will realize on ...
  2. Running Yield

    Running yield is the annual income on an investment divided by ...
  3. Dollar Bond

    A dollar bond is a U.S. denominated bond that trades outside ...
  4. Long Bond

    The long bond is a 30-year U.S. Treasury Bond, the bond with ...
  5. Bond Buyer 20

    Bond Buyer 20 is a representation of municipal bond trends based ...
  6. Current Yield

    Current yield is the annual income (interest or dividends) divided ...
Related Articles
  1. Investing

    The Negative Rates of Europe's Central Banks

    We are currently seeing negative central bank deposit rates and government and corporate bonds with negative yields, but there are investors buying into these securities. Why?
  2. Investing

    4 basic things to know about bonds

    Learn the basic lingo of bonds to unveil familiar market dynamics and open to the door to becoming a competent bond investor.
  3. Investing

    Corporate Bond Basics: Learn to Invest

    Understand the basics of corporate bonds to increase your chances of positive returns.
  4. Investing

    Corporate Bonds: Advantages and Disadvantages

    Corporate bonds can provide compelling returns, even in low-yield environments. But they are not without risk.
  5. Insights

    How Negative Interest Rates Can Affect Bond Prices

    Interest rates have gone negative in Europe, and bond yields are following suit. Here's why investors still buy them.
  6. Investing

    Why Bond Prices Fall When Interest Rates Rise

    Never invest in something you don’t understand. Bonds are no exception.
  7. Investing

    U.S. Corporate Bonds: The Last Safe Place to Make Money

    There aren't many other sources right now for relatively safe, steady income.
  8. Investing

    The Best Bet for Retirement Income: Bonds or Bond Funds?

    Retirees seeking income from their investments typically look into bonds. Here's a look at the types of bonds, bond funds and their pros and cons.
  9. Investing

    What Bonds Are Saying About The Next Stock Plunge

    The relationship between bonds and stocks can reveal a lot about the future direction of the stock market.
RELATED FAQS
  1. What causes a bond's price to rise?

    Should you invest into bonds? Learn about factors that influence the price of a bond, such as interest rates, credit ratings, ... Read Answer >>
  2. Can a bond have a negative yield?

    It is unlikely that a bond will have a negative yield but there are a few rare exceptions. Learn of the cases in which a ... Read Answer >>
  3. What does a negative bond yield mean?

    Find out what it means when a bond has a negative yield and what circumstances must arise for the yield to be negative when ... Read Answer >>
Hot Definitions
  1. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  2. Current Assets

    Current assets is a balance sheet account that represents the value of all assets that can reasonably expected to be converted ...
  3. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  4. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  5. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
  6. Depreciation

    Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life and is used to account ...
Trading Center