Capital Markets: Challenges and Developments

What are Negative-Yield Bonds?


From UPSC perspective, the following things are important :

Prelims level: Negative-Yield Bonds

Mains level: Not Much

China recently sold negative-yield debt for the first time, and this saw high demand from investors across Europe.

Try this PYQ:

Q.Which of the following is issued by registered foreign portfolio investors to overseas investors who want to be part of the Indian stock market without registering themselves directly?

(a) Certificate of Deposit

(b) Commercial Paper

(c) Promissory Note

(d) Participatory Note

What are 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 them?

  • Negative-yield bonds attract investments during times of stress and uncertainty as investors look to protect their capital from significant erosion.
  • At a time when the world is battling the Covid-19 pandemic and interest rates in developed markets across Europe are much lower.
  • Hence, investors are looking for relatively better-yielding debt instruments to safeguard their interests.

Why is there a huge demand?

  • While Europe, the US and other parts of the world are facing a second wave of Covid-19 cases, China has demonstrated that it has controlled the spread of the pandemic and is therefore seen as a more stable region.
  • Many feel that European investors are also looking to increase their exposure in China, and hence there is a huge demand for these bonds.
  • The fact that the 10-year and 15-year bonds are offering positive returns is a big attraction at a time when interest rates in Europe have dropped significantly.
  • As against minus —0.15% yield on the 5-year bond issued by China, the yields offered in safe European bonds are much lower, between –0.5% and —0.75%.

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