Negative Yield Bonds: UPSC Daily Important Topic | 10 JULY 2022

Negative Yield Bonds:

✓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.

Reasons behind buying Negative Yield Bonds:

✓To create a diverse portfolio: Many hedge funds and investment firms that manage mutual funds invest in negative bonds in order to diversify their investment.

✓To use them as collateral: Bonds are often used to pledge as collateral for financing and as a result, need to be held regardless of their price or yield.

✓To take Benefit from Currency Gain: Foreign investors might believe the currency’s exchange rate will rise, which would offset the negative bond yield.

✓To Avoid Domestic Deflation Risk: Domestically, investors might expect a period of deflation, or lower prices in the economy.