There are over 17 trillion dollars of bonds with negative yields. Does this mean you are paying someone for the privilege of loaning them money? And why are people buying them?

Monday Morning Money—Bonds With Negative Yields

Each episode of Monday Morning Money is also broadcast on Local Radio, WMOA (1490 AM and 101.3 FM).  You can hear it at 11:07 every Monday. 

In addition, you can also hear this episode on our YouTube Channel.  Please take a moment to subscribe, as it helps our analytics and improves our reach.  This also appears on Facebook and LinkedIn.  

What's On Your Mind?

Do you have a question about what’s happening in the world of finance or investing?  Is there a topic that has you curious?  We’d love to hear from  you.

 We’ll do our best to answer it in a future episode.  To submit your question, fill out the form.  If you prefer, you can send us an email directly.  That email address is neal@flemingwatson.com

Enter Your Question Here

$17 Trillion of Bonds With Negative Yields

There has been a lot of attention lately about the more than $17 trillion of debt with negative yields. Much of that is issued by foreign governments. But there is about a trillion dollars in corporate debt with negative yields
 
So does this mean you are paying these countries for the privilege to loan them money?

The Basics of Yield

Yield is the return you will earn if you buy and hold a bond until it matures. It factors in the interest rate, the return of your principal, how long until it matures, and the price you pay.
 
So keep in mind, yields and interest rates are NOT the same thing. In some cases, these bonds could pay the investor interest. German bonds currently do not. But you can have a bond with a negative yield which does pay interest.
 
The thing which causes their yields to be negative is the price investors have to pay. Paying a high price and holding the bond to maturity assures you of a negative return—even though you might collect interest along the way.
 
Let’s look at a simple example. You have a bond which matures 10 years from now. It has a coupon or interest payment of 1.6% per year. You collect that for the life of the bond. When the bond matures, the issuer typically redeems them at a price of $100. If you buy this bond for a price of $116 or more, your yield will be negative. Why? Because the return from your interest won’t be enough to compensate for the high price you have to pay.

Why Buy Bonds With Negative Yields?

This is where it helps to understand the relationship between yield and bond prices. Yields and prices are inversely related. That means if one goes up, the other goes down. Think about a teeter totter. On one end you have prices, the other side yields.
So why would someone buy bonds with negative yields? If you know you are going to lose money holding these notes, why wouldn’t you just put the money under your mattress?
 
One theory is speculation.  Those who are buying these notes are speculating that yields will go even lower. That’s the only way buying a bond with a negative yield results in a profit.
  
Those who are buying these notes are speculating that yields will go even lower. That’s the only way buying a bond with a negative yield results in a profit.

Buy Low, Sell High

There is a saying in the investment world. Buy low, sell high. With bond yields at extremely low—and in some cases negative—levels, it means prices are already high. Buying bonds with negative yields, or longer term bonds with very low yields, seems like a recipe for the opposite.
 

Stay Informed.

Monday Morning Money is a podcast talking about current events which  impact your bottom line.  

If you would like to be notified when a new episode is released, sign up for our mailing list.  Just complete the form.

Join Our List Today!

* indicates required
Financial Planning

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

Our Most Recent Videos

When Planning for Retirement, Where Do You Start?

When preparing for retirement, where do you start?  That is a question submitted by Tony.  Today, on Monday Morning Money we’ll answer it. Video: Answering A Reader Question, Where Do You
Watch Now

September Client Letter

September Client Letter Quarterly reports will be mailed out very soon.  Included with those reports is our September Client Letter.  If you would like to download a PDF copy of
Watch Now

People are Living Longer

People are living longer. This creates bigger challenges for your nest egg.   Video: People are Living Longer Each Episode of Monday Morning Money is also broadcast on Local Radio, WMOA (1490
Watch Now

No Commissions for Equity Trades

Yesterday, TD Ameritrade announced there would be no commissions for equity trades. They reduced the ticket charge from $6.95 to zero on all stock and option trades. This includes Exchange
Watch Now