(gentle music)
- [Narrator] This chart shows the yield
on the German government's 30-year bonds
over the past few months.
You'll notice something unusual
happened in early August.
The yield dropped below zero.
A yield is the return
investors receive on a bond.
A negative yield is the
opposite, meaning investors
are receiving less money
than they originally paid.
Negative yields are a
relatively new feature
in the world's bond markets,
but they're appearing
with increasing frequency.
Globally, around $16
trillion worth of bonds
currently carry a negative yield.
Bonds are one of the safest
investments on the market.
They're staples of many
investment portfolios,
from pension funds to retirement accounts.
Investors like them because
of their reliable returns.
So how did some bond yields go negative?
And why would investors
keep putting their money
in assets with negative returns?
To understand negative yields,
you need to understand how bonds work.
Bonds are a form of debt that governments
and companies issue for
various lengths of time.
A bond's lifespan can
range from a few weeks
to a few decades.
Bond issuers make
regular interest payments
to bond holders over the asset's lifespan.
This is known as the coupon rate.
But bonds are often bought and
sold on the secondary market.
Their prices fluctuate, which affects
what an investor can expect to earn.
The yield is a calculation
of how much an investor
can expect to make from
holding onto a bond bought
at a particular price for a
particular length of time.
The yield of a bond is
inversely related to its price.
High demand in the bond
market drives up prices
and drives down yields.
This is largely why yields are negative.
Right now, the bond market
is experiencing unusually high demand.
There are a few reasons for this.
The first is that investors have grown
increasingly concerned
about the lack of growth
in the global economy.
Amid low inflation, political uncertainty,
and trade disputes, investors
are putting more money
into safer assets, like bonds.
The second is that several
central banks around the world
have set their interest rates below zero.
Central banks are banks
for commercial banks.
So when they set negative
interest rates, commercial banks
must pay them for the privilege
of holding their money.
This incentivizes commercial banks
to lower the interest
rates they charge to.
So far, commercial banks
have been reluctant
to pass that negative
rate to average consumers,
but some have passed on
the cost to companies
and large institutional investors.
Negative rates give investors
an incentive to buy bonds
rather than park their money at a bank.
This drives up demand.
These factors have
pushed bond prices higher
and driven down yields, so
much so that they are now
in negative territory and,
in some cases, even below
the negative rates set by central banks.
So why would investors
continue to buy bonds
with negative yields?
Well, if demand continues
to rise, buying now means
potentially selling bonds
later at a higher price.
This can help offset
losses in the short term,
but the long-term implications
of negative yields could
mean lower returns on pensions
and retirement accounts,
meaning workers might have
to save more and work longer.
Negative bond yields, and
negative interest rates
in general, are viewed
as a short-term remedy
to get economies moving.
But with the footprint of
negative rates getting deeper
and wider, investors worry
that they may be less
of a temporary fix, and
more of a permanent fixture
in the market.
(gentle music)
