Negative bond yields

Just want to check my understanding on this. A government issuing a bond at a negative yield implies they are charging you, for example, $1,010 in exchange for $1,000 one year from now. Who would buy this? Or are yields negative relative to a discount rate? People aren't actually losing money on a nominal basis, correct?

 

If you hold swissy 10Y to maturity, you will lose money. Yes, it is actually a negative all-in yield. No, its not relative to a discount rate.

You can still make money on this if you think yields go more negative, however.

As for why, its due to currency flows. You'll notice that the swiss yields went negative when the franc was de-pegged (and skyrocketed relative to other currencies) in mid-January. Keep in mind that bidding the swiss yield down is equivalent to going long franc and shorting your own currency (if you are a non-swiss investor).

I think this all starts to make more sense when you start thinking about it as a currency trade. Swiss nationals are not buying these bonds at these yields, as far as I know.

Array
 

Yes, they are essentially charging you. The price of the bond up front would factor in the "charge", rather than any sort of reverse coupon.

Not my area of expertise but I would think that buyers could consist of:

  1. Domestic banks, insurance companies and pensions required to hold reserves in sovereigns

  2. Investors who are worried about a mass banking failure (I would assume that not all countries have FDIC like insurance) and find more comfort in sovereigns, enough to pay a premium

-and number 1-

  1. Those who expect a prolonged period of deflation. Sovereign yields are a combination of expected real rates plus inflation, so deflation expectations greater than current expectations for real rates would make even negative yields a bargain over holding cash.
 
BreakingOutOfPWM:

Yes, they are essentially charging you. The price of the bond up front would factor in the "charge", rather than any sort of reverse coupon.

Not my area of expertise but I would think that buyers could consist of:

3. Domestic banks, insurance companies and pensions required to hold reserves in sovereigns

2. Investors who are worried about a mass banking failure (I would assume that not all countries have FDIC like insurance) and find more comfort in sovereigns, enough to pay a premium

-and number 1-

1. Those who expect a prolonged period of deflation. Sovereign yields are a combination of expected real rates plus inflation, so deflation expectations greater than current expectations for real rates would make even negative yields a bargain over holding cash.

If you are losing money on a nominal basis I still don't see how buying this could ever be good. Cash has a 0 yield and is therefore strictly better than a negative yielding bond. What am I missing?

 

For a retail investor it would not be good, but some of the biggest players in the soverign market arent in it to make money it simply a form of holding a highly liquid asset. They also might not want to risk all that money in a bank because it is not insured. Neither are bonds, but i guess this would be a form of diversification.

 

You don't lose money if you buy a negative yielding asset, provided you can fund this asset at an even more negative rate. Otherwise, it's all about the various forms of value that bonds represent (e.g. bonds can be used as collateral, which is not the case for cash; bonds are used to satisfy regulatory requirements; bonds can be held as an expression of a view on the ccy; etc etc).

As to cash being an alternative, you need to be able to store cash, which means that cash doesn't actually yield 0 in practice, once you incorporate various costs, such as insurance, vault rental, security, etc etc.

Finally and curiously, in Denmark, a country where rates have been pushed into deeply negative territory, there have been discussions about allowing people to deduct the amounts they pay on deposits from their taxes.

 

non-domestic investors can make negative yielding foreign ccy bonds value Accretive if the foreign ccy rate appreciates - eg a US based investor buying negative Swissy govt bonds could still make money if the Swiss / USD rate rises over the life of the bond. Don't know whether this is happening in reality though as I'd question why one needs to buy bonds to make a FX bet if that's the purpose.

 

Yes, it does happen in reality... For a whole variety of investors (e.g. reserve managers), there is no such thing as an FX bet w/o a purchase of some asset that is denominated in the target currency. Specifically, the only way I can be long CHF is by holding a CHF t-bill or a bond or another asset. Obviously, the trade off is whether you want to get a better yield (possibly non-negative) in exchange for bearing interest rate risk.

 
Cries:

I think this all starts to make more sense when you start thinking about it as a currency trade. Swiss nationals are not buying these bonds at these yields, as far as I know.

If you want to long CHF, can't you just long CHF via futures/option? Why would you buy have to buy swiss bond?

Martinghoul:

For a whole variety of investors (e.g. reserve managers), there is no such thing as an FX bet w/o a purchase of some asset that is denominated in the target currency. Specifically, the only way I can be long CHF is by holding a CHF t-bill or a bond or another asset.

Would you say macro funds do the same thing or they just simply long CHF via futures/option without buying the swiss bond?

 

Ehhhhhh. Not sure what all gibberish written above me is about and I don't want to write a long thesis about this. To keep it simple, nominal yields=real yields + inflation expectations. Aside from capital flows due problem in the EU, the market is really saying (1) Swittzerland is as credit worthy as a bar of gold. Real yields of ~~ 0%. and (2) Inflation (yr/yr change in prices) is expected to be NEGATIVE for the tenor of the maturity, ie utter DEFLATION. Not DISINFLATION but full DEFLATION. Hence you get Negative nominal yields. QED

In a deflationary environment that value of Assets DECLINE. IE if an ASSET was WORTH $1000 today, tomorrow it will be worth $990. The concept of paying the Swiss Govt money, ie negative nominal yields, for a bond DOESN'T sound crazy if expected inflation=realized inflation. When your universe of invest-able assets are all generating negative returns, SWISS sovereigns, a highly credit worth country with large gold reserves, do not seem as a bad of an investment vehicle for protecting the value of your capital RELATIVE to other assets.

Will be starting a PhD in Econ this year, work at a hedge fund but my first job coming out of undergrad was as a central banker at the NY Fed. I'll take my Noble prize now thank you.

 
sillymonkey123:

Ehhhhhh. Not sure what all gibberish written above me is about and I don't want to write a long thesis about this.
To keep it simple, nominal yields=real yields + inflation expectations.
Aside from capital flows due problem in the EU, the market is really saying (1) Swittzerland is as credit worthy as a bar of gold. Real yields of ~~ 0%.
and (2) Inflation (yr/yr change in prices) is expected to be NEGATIVE for the tenor of the maturity, ie utter DEFLATION. Not DISINFLATION but full DEFLATION.
Hence you get Negative nominal yields.
QED

In a deflationary environment that value of Assets DECLINE. IE if an ASSET was WORTH $1000 today, tomorrow it will be worth $990. The concept of paying the Swiss Govt money, ie negative nominal yields, for a bond DOESN'T sound crazy if expected inflation=realized inflation. When your universe of invest-able assets are all generating negative returns, SWISS sovereigns, a highly credit worth country with large gold reserves, do not seem as a bad of an investment vehicle for protecting the value of your capital RELATIVE to other assets.

Will be starting a PhD in Econ this year, work at a hedge fund but my first job coming out of undergrad was as a central banker at the NY Fed. I'll take my Noble prize now thank you.

Real yield of 0% in Switzerland? O rly?
 

I am not an expert about the euro, I have a hard time as it is figuring out how the US economy is going to do. Again, I'll repeat, EXPECTED inflation not PAST inflation. You do know the difference between IMPLIED volatility and REALIZED Volatility. I have'nt looked at French soverniegns. If tenors 5 Lower Inflation Expectations.

 
Best Response
sillymonkey123:

Ehhhhhh. Not sure what all gibberish written above me is about and I don't want to write a long thesis about this.
To keep it simple, nominal yields=real yields + inflation expectations.
Aside from capital flows due problem in the EU, the market is really saying (1) Swittzerland is as credit worthy as a bar of gold. Real yields of ~~ 0%.
and (2) Inflation (yr/yr change in prices) is expected to be NEGATIVE for the tenor of the maturity, ie utter DEFLATION. Not DISINFLATION but full DEFLATION.
Hence you get Negative nominal yields.
QED

In a deflationary environment that value of Assets DECLINE. IE if an ASSET was WORTH $1000 today, tomorrow it will be worth $990. The concept of paying the Swiss Govt money, ie negative nominal yields, for a bond DOESN'T sound crazy if expected inflation=realized inflation. When your universe of invest-able assets are all generating negative returns, SWISS sovereigns, a highly credit worth country with large gold reserves, do not seem as a bad of an investment vehicle for protecting the value of your capital RELATIVE to other assets.

Will be starting a PhD in Econ this year, work at a hedge fund but my first job coming out of undergrad was as a central banker at the NY Fed. I'll take my Noble prize now thank you.

I just threw up a little in my mouth
Array
 

I wrote approximately sign, the squiggly thinggy. It showed a flat line instead. I am exaggerating of course on exactly 0% real yields. I am sure its something, but obviously the inflation expectation is negative enough to offset the positive value. I still don't recommend owning these bonds by the way. Just explaining this puzzle everyone is thinking about,

 

Modi eum nihil necessitatibus ea. Error sunt ut cumque. Enim saepe veritatis numquam pariatur incidunt. Amet et voluptates quis fuga labore iusto molestiae. Eveniet minus alias velit eos. Omnis et quos dolor et numquam possimus debitis.

Velit consectetur consequatur rerum dolores iste. Vitae error et illum.

Career Advancement Opportunities

March 2024 Investment Banking

  • Jefferies & Company 02 99.4%
  • Goldman Sachs 19 98.8%
  • Harris Williams & Co. (++) 98.3%
  • Lazard Freres 02 97.7%
  • JPMorgan Chase 03 97.1%

Overall Employee Satisfaction

March 2024 Investment Banking

  • Harris Williams & Co. 18 99.4%
  • JPMorgan Chase 10 98.8%
  • Lazard Freres 05 98.3%
  • Morgan Stanley 07 97.7%
  • William Blair 03 97.1%

Professional Growth Opportunities

March 2024 Investment Banking

  • Lazard Freres 01 99.4%
  • Jefferies & Company 02 98.8%
  • Goldman Sachs 17 98.3%
  • Moelis & Company 07 97.7%
  • JPMorgan Chase 05 97.1%

Total Avg Compensation

March 2024 Investment Banking

  • Director/MD (5) $648
  • Vice President (19) $385
  • Associates (86) $261
  • 3rd+ Year Analyst (13) $181
  • Intern/Summer Associate (33) $170
  • 2nd Year Analyst (66) $168
  • 1st Year Analyst (202) $159
  • Intern/Summer Analyst (144) $101
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
Secyh62's picture
Secyh62
99.0
3
Betsy Massar's picture
Betsy Massar
99.0
4
BankonBanking's picture
BankonBanking
99.0
5
dosk17's picture
dosk17
98.9
6
DrApeman's picture
DrApeman
98.9
7
kanon's picture
kanon
98.9
8
CompBanker's picture
CompBanker
98.9
9
GameTheory's picture
GameTheory
98.9
10
Jamoldo's picture
Jamoldo
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”