- This week Germany issued longer end bonds at negative yield first time ever in its history. 5 year bund was issued at a negative yield of -0.08 basis points. Finland was the first country to issue bonds below zero yields.
- Two year yields for some countries like Switzerland, Germany, Sweden, Netherlands, and France are deep into the negative territory.
- According to JP Morgan, some $ 2 trillion worth of bonds are currently into negative territory. That is a huge number,
The rationale -
- Bond value is calculated as a net present value of all future payments discounted at a specific rate.
- So the effect of this negative yield won't come into play immediately. The buyer would even continue to receive positive payments if a coupon is attached with the bond, throughout its lifetime.
- With the bond purchase by the ECB looms ahead, it is reasonable to expect a capital appreciation over the value of the bond. In this case buyer won't lose money but gain, until the bond is held till maturity.
- In a deflationary scenario, the real yields of the bonds remain positive making the buyer still gain over inflation.
- It makes perfect sense for the European banks to invest in Germany's negative yield of -0.08% than to park money over ECB at -0.2%
With the ECB purchase looming, bond yields are expect to dive further into negative territory and Euro to suffer as a consequence.
