Negative Bond Yield

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Negative Bond Yield

A negative bond yield occurs when an investor receives less money at a bond’s maturity than the price they paid. In that situation the bond buyer is effectively paying the issuer to hold their money, rather than earning interest.

Key takeaways

  • A bond has a negative yield if its purchase price is high enough that coupon payments and principal repaid at maturity leave the buyer with a net loss.
  • Bond prices move inversely to yields: rising prices can push yields below zero.
  • Investors buy negative-yielding bonds for reasons other than the nominal return, such as safety, regulatory or allocation needs, currency expectations, or collateral purposes.

How negative yields arise

Bonds are debt instruments that pay periodic coupon interest and return principal at maturity. When bonds trade on the secondary market, their prices fluctuate with economic conditions, interest-rate expectations, supply and demand, and issuer credit quality.

Because coupon payments are fixed, a bond’s yield (the return an investor can expect) falls when its price rises. If price rises enough above the present value of future coupons and principal, the investor’s yield can become negative — meaning they will get back less in nominal terms than they paid.

Yield-to-maturity (YTM) is the standard measure used to compare returns across bonds; a negative YTM means holding the bond to maturity produces a negative annualized return.

Why investors buy negative-yielding bonds

Several types of investors may accept negative yields for non-interest reasons:

  • Asset-allocation and regulatory requirements
    Institutional investors (pension funds, insurance companies, mutual funds, hedge funds) often must hold a certain allocation of fixed income or eligible high-quality bonds, even if yields are negative. Bonds are also used as collateral in financing arrangements.

  • Safety and capital preservation
    In periods of extreme market stress, investors may prefer a small guaranteed loss to the prospect of large equity losses. High-quality government bonds (e.g., Japanese or German government bonds) can act as safe-haven assets.

  • Currency expectations and hedging
    Foreign investors may buy negative-yielding bonds if they expect the issuer’s currency to appreciate; currency gains can offset a negative nominal yield. Similarly, expectations of deflation (falling prices) can make a negative nominal yield acceptable in real terms.

  • Central banks and macro policy operations
    Central banks may purchase negative-yielding bonds as part of monetary policy, influencing market prices and yields.

Example

Two simplified examples illustrate the difference between a positive and a negative yield:

Bond ABC
Face value: $100
 Maturity: 4 years
Coupon: 5% ($5 per year)
 Purchase price: $105

Total coupon payments = $5 × 4 = $20. At maturity the investor receives $100 principal, so total receipts = $120. Net gain = $120 − $105 = $15 → a positive yield.

Bond XYZ
Face value: $100
 Maturity: 4 years
Coupon: 0%
 Purchase price: $106

No coupons. At maturity the investor receives $100, so net loss = $100 − $106 = −$6. Spread over four years this simple example implies about −1.5% per year (the exact yield-to-maturity calculation may differ slightly).

Implications

Negative yields reflect strong demand for safety, regulatory constraints, currency and macro expectations, or central-bank intervention rather than traditional fixed-income income generation. They signal that investors are prioritizing capital preservation, liquidity, or other strategic objectives over positive nominal returns.