Negative Bond Yield

A negative bond yield occurs when the interest rate on a bond is lower than the inflation rate. This means that the bond is not providing enough return to compensate investors for the inflationary erosion of the purchasing power of the money they are investing.

Here are the key points to know about negative bond yields:

Causes:

• High inflation: When inflation is high, the central bank may lower interest rates to try to control inflation.
• Economic uncertainty: High levels of economic uncertainty can lead investors to sell bonds, causing their prices to fall and their yields to become negative.
• Quantitative easing: In some cases, central banks may use quantitative easing (QE) programs to buy large amounts of bonds, depressing their yields.
• Safe haven demand: When there is a lot of demand for safe haven assets like bonds, even negative yields can exist.

Effects:

• Impact on investments: Investors might be less willing to invest in bonds, or they might shift their investments to other assets with higher returns.
• Impact on the economy: Negative bond yields can make it more difficult for the economy to grow.
• Impact on the monetary policy: Central banks might have to take other measures to control inflation, such as setting negative interest rates on some deposits.

At present, a number of countries have negative bond yields:

• Germany
• Japan
• Switzerland
• Denmark
• Austria

The negative bond yield phenomenon is a complex and controversial one. It is important to understand the causes and effects of negative bond yields in order to understand the current global economic landscape.

Here are some additional resources that you may find helpful:

• Leaning into the Negative Bond Yield Enigma: A Wall Street Journal article explaining the concept of negative bond yields.
• Central Banks Lower Rates as Inflation Rises: An Investopedia article discussing negative bond yields in the context of inflation.
• What Are Negative Bond Yields and Why Do They Exist?: A PineBridge Investments article explaining the causes and potential effects of negative bond yields.