China’s negative yield bonds

China sold negative-yield debt for the first time, and this saw high demand from investors across Europe.

What are 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.

Why do investors buy 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.

Why is there a huge demand?

• 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 —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 and its GDP expanded by 4.9% in the third quarter of 2020.