Bonds now just a commodity........
Monday 13/4/15
Bonds now just a commodity........
"Negative effects of QE / German 10-year yields heading below zero" , The Financial Times p.17
Last week Switzerland issued a tranche 10-year bonds at a negative yield .... perhaps it's worth just reminding ourselves what that means : the buyer of the bonds is paying money for the privilege of lending money to the issuer, and is guaranteed to lose money if he holds the bonds to maturity.
We've been seeing negative yields in the shorter maturities for some time, but this was the first time a negative yield has been attached to a bond as long as 10 years. Now, with the ECB's quantitative easing in full swing, German 10-year bonds are poised to follow suit. Why would you buy a bond that costs you money ? These days, it's deemed worthwhile to pay a little to be able to put your money somewhere safe (i.e. in sovereign debt) and hope to make money on buying and selling the price of the bond even if it provides no interest income.
Buying and selling for profit and loss ? No interest income ? This is effectively reducing a bond to just another commodity. One could almost be trading a lump of gold or a barrel of oil. This may be all very well for traders, but for pension fund managers say, whose job it is to provide a safe return on their investments, negative yields are thoroughly bad news.
Bonds now just a commodity........
"Negative effects of QE / German 10-year yields heading below zero" , The Financial Times p.17
Last week Switzerland issued a tranche 10-year bonds at a negative yield .... perhaps it's worth just reminding ourselves what that means : the buyer of the bonds is paying money for the privilege of lending money to the issuer, and is guaranteed to lose money if he holds the bonds to maturity.
We've been seeing negative yields in the shorter maturities for some time, but this was the first time a negative yield has been attached to a bond as long as 10 years. Now, with the ECB's quantitative easing in full swing, German 10-year bonds are poised to follow suit. Why would you buy a bond that costs you money ? These days, it's deemed worthwhile to pay a little to be able to put your money somewhere safe (i.e. in sovereign debt) and hope to make money on buying and selling the price of the bond even if it provides no interest income.
Buying and selling for profit and loss ? No interest income ? This is effectively reducing a bond to just another commodity. One could almost be trading a lump of gold or a barrel of oil. This may be all very well for traders, but for pension fund managers say, whose job it is to provide a safe return on their investments, negative yields are thoroughly bad news.
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