China’s negative yield bonds are in demand

#GS2 #INTERNATIONAL

At a time when the world is battling the Covid-19 pandemic and interest rates in developed markets across Europe are much lower, investors are looking for relatively better-yielding debt instruments to safeguard their interests.

  • Last week, China sold negative-yield debt for the first time, and this saw a high demand from investors across Europe. 
  • As yields in Europe are even lower, there was a huge demand for the 4-billion-euro bonds issued by China. 
  • China’s 5-year bond was priced with a yield of –0.152%, and the 10-year and 15-year securities with positive yields of 0.318% and 0.664%.

 

Negative-yield bonds

  • These are debt instruments that offer to pay the investor a maturity amount lower than the purchase price of the bond. 
  • These are generally issued by central banks or governments, and investors pay interest to the borrower to keep their money with them.
  • Negative-yield bonds attract investments during times of stress and uncertainty as investors look to protect their capital from significant erosion. 
  • At a time when the world is battling the Covid-19 pandemic and interest rates in developed markets across Europe are much lower, investors are looking for relatively better-yielding debt instruments to safeguard their interests.
  • The fact that the 10-year and 15-year bonds are offering positive returns is a big attraction at a time when interest rates in Europe have dropped significantly. 
  • As against minus —0.15% yield on the 5-year bond issued by China, the yields offered in safe European bonds are much lower, between –0.5% and —0.75%.
  • Also, it is important to note that while the majority of the large economies are facing a contraction in their GDP for 2020-21, China is one country that is set to witness positive growth in these challenging times: its GDP expanded by 4.9% in the third quarter of 2020.
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