InvestorQ : We see negative interest rates in most countries and there are also investors willing to put in money in negative interest bonds. What are the implications of this?
Riya Dwivedi made post

We see negative interest rates in most countries and there are also investors willing to put in money in negative interest bonds. What are the implications of this?

Answer
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rhea Babu answered.
1 year ago


According to Bloomberg estimates there are bonds worth over $10 trillion that are carrying negative yields, predominantly in Europe and Japan. Negative interest rates mean that you actually pay to deposit money with bank. The question then is why should any rational investor ever want to buy bonds that are giving negative yields?

There are 4 broad reasons why there are still investors who want to buy negative yield bonds...

· Many institutions like insurance companies, endowments, pension funds are required by statute to invest a basic minimum corpus in government bonds. These institutional investors will have to necessarily invest in these government bonds even if they carry negative yields. This is more of a statutory compulsion.

· Then there are active investors in negative yield bonds. At the end of the day, what matters is real return (return net of inflation) and not nominal returns. If the investor expects further fall in prices and the economy slipping further into deflation, then negative yield bonds may still make sense as their real yields may still be positive.

· Thirdly, there are investors who would buy negative yield bonds betting on a further fall in interest rates. Take the case of ECB interest rates that are currently quoting at -0.3%. If the expectation is that the ECB may cut rates lower to -0.5%, then buying a negative yield bond will still give you capital appreciation.

· Lastly, there is an interesting currency game. This is very true of countries like Japan, which run current account surpluses. There is a strong demand for Japanese government bonds although they carry negative yields due to the strength of the Yen. The JP¥ has appreciated consistently against most currencies in the last one year due to safe haven buying of Yen. This may impel investors to buy Japanese Yen Bonds to benefit from currency appreciation even though they carry negative rates.