Negative-Yield Bond Market Reaches $7.9 Trillion

Chris Gaetano
Published Date:
Dec 19, 2018

There is currently about $7.9 trillion worth of negative-yield bonds circulating throughout the world, and recent announcements from the Bank of Japan indicate that this amount could grow even larger next year, according to Bloomberg.

These are literally bonds that, when they reach maturity, give less money than what was initially put into them. You are guaranteed to lose money on the principal if you invest in them. So that raises the question: Why exactly would anyone buy them?

There are a couple of reasons why there was, and still is to some degree, demand for such bonds. One is that central banks buy bonds to drive economic growth and that they continue doing so even in the event of a negative yield. Similarly, certain large institutional investors will also keep buying them because they're bound by their charters to do so even if the yield slips into the negative territory. On a small scale, individual investors might choose to buy them on the belief that the currency they're denominated in will rise in value to the point where the increased worth cancels out the negative yield, at which point it can still generate profit. Along these same lines, they may also be bought on the belief that the currency might fall in value, in which case the bond, while a guaranteed money-loser, will still retain more value than actual cash. 

Their creation is largely an artifact of the extremely low interest rates that had been favored by central banks in the years following the economic crisis and have only recently begun to climb back up. Indicating that times have changed, the current figure is actually much lower than it's been in the past, as in 2016 it was estimated that there was $11 trillion worth of negative debt worldwide. However, according to Bloomberg, as fears of another recession begin crystallizing through the global economy, Japan's central bank has indicated that it is fine with bond yields lowering, reaching zero, or even dipping back into negative territory, and other countries could follow suit. What this means for the global economy, particularly when recession fears are riding high, remains to be seen. 

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