There is now approximately $17 trillion of negative yielding bonds trading across the globe, mostly in Japan and some European markets. A bond’s yield is a single rate that combines a bond’s coupon payments and an amount to compensate the buyer for the time until the bond matures. Typically, bonds have a positive yield and buyers expect to earn a positive return. A negatively yielding bond indicates that the bond buyer is expecting to lose money on the bond.
Most buyers of negative yielding bonds are banks, insurance companies, or other entities that are required to maintain liquid assets for use as collateral, regardless of the price or yield. Another reason to purchase negative yielding bonds would be if you were concerned about realizing larger losses in other investments. This phenomenon occurred in December 2008 when U.S. Treasury Bill yields went negative as global equity markets plummeted.
The good news is that the amount of negative yielding bonds is incentivizing global investors to look at the relatively attractive U.S. bond and equity markets. This has helped propel the U.S. bond market up 8.5% and the S&P 500 Index up 20.5% through the first nine months of this year.
Alan Bergin is the Senior Vice President of Fund Evaluation Group in Dallas, TX, the Foundation’s consulting firm. Financial Forecast is a quarterly installment produced by FEG and the Community Foundation.