Tuesday 14 April 2015 by FIIG Securities FIIG Securities Legacy

Negative bond yields explained

Chin Leng Koay asked - What is meant by negative yield in bonds? Does it mean a borrowing entity is actually asking the investor to pay it an interest amount quarterly or six-monthly or annually? What is the rationale?

Significant quantitative easing and very low interest rates have pushed some of the very lowest risk bonds into negative yield territory. Generally, what has been happening is that demand for existing bonds pushes the prices up so high that the net yield to maturity becomes negative.

Just last week the Swiss government was the first to issue a new bond with a negative yield. The bond was actually issued with a normal (positive) coupon rate of 1.50%, but was issued at a price of $116.00 (even though its face value is $100 and that is what will be repaid at maturity), which implied a negative yield of -0.055%.  

Government bonds are generally the ones showing negative yields to maturity, although global consumables company, Nestle does have a bond trading at negative yields. The government or companies will still pay income on the bond, but the upfront, high price of the bond outweighs the sum of all the interest (coupon) payments on the bonds. Issuers are also able to “tap” existing bond issues and so can issue bonds at higher than their $100 face value.

For more information please see an article from The Wall Street Journal Swiss, Mexican bond deals represent milestones for debtExternal link - opens in a new window and another from The Financial Times Switzerland becomes first to sell 10 year debt at negative yield.External link - opens in a new window