Negative Bond Yield

Glossary

Banking

Negative Bond Yield

Super-accommodative unorthodox monetary policies unleashed by major central banks in the wake of 9/11 and ever since (including to stimulate the global economy during the Covid-19 crisis) have seen interest rates at zero or in negative territory. Zero Interest-Rate Policy and Negative Interest-Rate Policy a.k.a. ZIRP/NIRP combined with heavy asset-purchase programmes have pulled trillions of dollars-equivalent worth of bonds into negative yield territory. In simple terms, investors buying bonds with negative yields and holding them to maturity are guaranteed to make a loss. It’s akin to an investor paying a borrower for the right to own the bonds. A bond issued with a zero coupon at an issue price above 100, for example, will create a negative yield. Bonds with negative yields can still be profitable trades for investors if rates continue to fall or if the price of the bond rises and borrowers sell at the higher price, booking the capital gain as a profit.

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