Draft:Negative Yield Bonds

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In finance, a negative yield bond is a type of fixed-income security in which the investor suffers a loss when the bond is mature. This atypical situation arises when the bond's interest payments- also known as coupon payments- fall short of its face value, implying a return that's in the negatives. Negative yields can be experienced when the demand for secure, low-risk investments exceeds the number of existing investments. When economic uncertainty, or deflation, is more prominent, investors are more likely to settle for bonds that yield negative values as a means of preserving their capital. In these kinds of situations, investors invest in low-yield bonds and raise their prices in an attempt to lock in lower losses than they otherwise would. Negative yield bonds serve as a ceiling on the amount that will be lost during economic downturns in contrast to other asset types, which could see even larger value losses. Nevertheless, to grasp the nature of negative yield bonds better, it might be helpful to know how bonds work generally. A bond is a debt obligation of a corporate entity or a government to raise funds. When someone purchases a bond, they are in effect lending money to the issuer-surely a company or a government. In return for that loan, the issuer agrees to pay the interest on the bond during its term and pay back the face value of the bond upon its maturity date. The entirety of this income, both in the form of interest and repayment of principal, constitutes the yield of the bond, typically expressed as a positive number. Nevertheless, under some economic circumstances, the yield could turn unfavorable which would mean the investor would lose income on the investment as opposed to receiving a return. For instance, under typical market conditions, an investor might invest in a bond for $100 and, he expects to receive $105 at maturity, which will comprise both the interest and principal. However, the situation is reversed with a negative yield bond. The bond may be bought for $100, but the investor may only receive $95 when it matures, meaning they will undoubtedly lose money.

The Ascent and Decline of Negative Yield Bonds: A Historical Chronology

Over the past couple of decades, negative yield bonds have gained acceptance in the world's financial markets, especially during times of economic instability and irregular monetary policy. Both governments and companies from all around the world, including Germany, Japan, Netherlands, and Switzerland, have put up negative-yield bonds. Nevertheless, the exact creation date of the first negative-yield bond is difficult to pinpoint because of a number of variables, such as shifts in interest rates and market conditions, which caused yields to go negative. However, the majority of negative-yield bonds were issued with relatively modest yields, making them extremely vulnerable to a final flip to the negative under the correct market circumstance. Below is a timeline summarising major events in the emergence of negative yield bonds

1998: In the early 1990s, Japan experienced a long-run deflationary episode followed by extended economic stagnation after the bursting of the asset price bubble. The BoJ was the first among other key central banks to extend ultra-low interest rates, which prompted issues with extremely low yields.

2007-2008: The global financial crisis gave rise to massive financial and economic shocks around the world, forcing the central banks to finally implement aggressive monetary easing policies in order to revitalize the economy. In response to the crisis, key central banks such as the Federal Reserve, the (ECB), and the Bank of England dropped interest rates to nearly zero and initiated large-scale bond purchasing programs - so-called quantitative easing. This action geared up the stage for the emergence of negative yields.

2012: Investors were directed to havens during the European sovereign debt crisis and a fragile world economy, namely, the government bonds of financially secure countries. Germany and Denmark became the first countries whose government bonds issued negative yields. Investors will accept the guarantee of negative returns for the perceived safety of debt issued from these countries.

2014: With low inflation and weak economic growth, the Europeon Central Bank had to move beyond traditional measures to boost lending and investment. The ECB imposed a negative deposit rate that made banks pay for surplus reserves they maintained at the central bank. Negative yields on bonds across Europe deflated bond yields forcing banks to issue a record volume of negative yield bonds .

2016: The market for safe assets was fuelled by the growing concern about global trade and the global economic uncertainties brought forth in part by the UK Brexit referendum. Mid-2016 saw a total volume of negative-yielding bonds reaching a record level of approximately $13 trillion, composed of governmental and corporate bonds. Japan, Germany as well as Switzerland had the highest volume of negative yielding debt.

2019: The United States government did not explicitly issue any negative yield bonds but extremely low interest rates and rising economic anxiety sent U.S. Treasury yields into negative territory-at least in the secondary market, particularly for shorter-term bills. As of August 2019, over $17 trillion in bonds worldwide had negative yields. Although U.S. Treasuries themselves issued at nonnegative yields, some short-term securities did trade with negative yields in the secondary market.

2020: The COVID-19 epidemic brought about a worldwide economic tremor; therefore, governments and central banks globally adapted to aggressive monetary policies to stabilize financial markets. Negative yield bonds peaked at an all-time high of over $18 trillion by the end of 2020, primarily due to an extension of the buyback programs undertaken by central banks like the ECB and the Bank of Japan. Investors were in quest of the certainty of government debt during the uncertainty epidemic.

2021: The global economy was "severely dented" due to the pandemic, while inflationary pressures started to pop up, fuelling expectations of tighter monetary policies. Negative yield bonds began to decline in volume, especially in Europe and Japan, due to anticipated future rate hikes by investors. As of the middle of 2021, for instance,the cumulative sum of negative-yielding debt is at less than $14 trillion.

2022: Increasing inflationary pressures and indeed monetary policies worldwide have driven up bond yields. Many central banks, including the FED and ECB, have actually begun to raise their interest rate stance as inflationary pressure intensifies. This caused a dramatic reduction in the volume of negative-yielding bonds. As of December 2022, the world total of negative-yielding bonds decreased to about $1.6 trillion.

2023: The global inflationary pressures and the central bank's aggressive monetary tightening measures reduced the negative-yielding bonds percentage. As of early 2023, Negative-yielding Eurozone and Japan bonds were virtually eliminated as yields improved in all the developed world's leading markets with rising interest rates.