Chinmaya IAS Academy – Current Affairs Chinmaya IAS Academy – Current Affairs
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CONTEXT:
China sold negative-yield debt for the first time. 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%.
What are negative yeild bonds?
- These are debt instruments that offer to pay the investor a maturity amount lower than the purchase price of the bond.
- Can be issued by central banks or governments.
- Here, investors pay interest to the borrower to keep their money with them.
Bond Price and Yield:
A bond’s price moves inversely with its yield or interest rate; the higher the price of a bond, the lower the yield.The reason for the inverse relationship between price and yield is due, in part, to bonds being fixed-rate investments.
- Investors might sell their bonds if it’s expected that interest rates will rise in the coming months and opt for the higher-rate bonds later on.
- Conversely, bond investors might buy bonds, driving the prices higher, if they believe interest rates will fall in the future because existing fixed-rate bonds will have a higher rate or yield.
Key factors:
- It is the massive amount of liquidity injected by the global central banks after the pandemic began that has driven up prices of various assets including equities, debt and commodities.
- Many investors could also be temporarily parking money in negative-yielding government debt for the purpose of hedging their risk portfolio in equities.
- In case the fresh wave of the Covid-19 pandemic leads to further lockdowns of economies, then there could be further negative pressure on interest rates, pushing yields down further, and leading to profits even for investors who put in money at the current juncture.
SOURCE: ECONOMIC TIMES
