The risk behind negative-yielding bonds The risk behind negative-yielding bonds http://www.federatedinvestors.com/static/images/fed-logo-amp.png http://www.federatedinvestors.com/daf\images\insights\video\ellenberger-video-sept-2019-1-small.jpg September 13 2019 August 29 2019

The risk behind negative-yielding bonds

One big one: if you hold it to maturity, you'll lose money.
Published August 29 2019
My Content
Video Transcript
00:04
I’m Don Ellenberger, Head of Multi-Sector Strategies at Federated Investors.
00:09
How did we get to the point where we have almost $17 trillion of negative-yielding bonds?
00:15
Well the origin of negative yields goes back about 10 years. To pull the global economy out of a severe recession, central bank started slashing interest rates in hopes of spurring companies and consumers to borrow and spend more. In the United States, the Fed took its benchmark rate all the way down to zero, and left it there for seven years. And it worked! The economy did recover. But in Japan and Europe, where most negative-yielding bonds have been issued, zero wasn't low enough to stimulate growth. So central banks took short rates negative and eventually rates further out the curve turned negative as well. The thing about a bond that pays a negative yield, is if you buy it and hold it to maturity, you get back less than what you paid for it. It's a guaranteed money loser. These bonds literally eat your money.
01:05
Why would anyone buy bonds that “eat your money?”
01:09
Well, if you'd have bought 10-year German bunds earlier this year, at negative 20 basis points, you could sell them today at negative 70 basis points, and actually make a tidy little profit. So one reason, is for capital gains, which you might refer to as the greater fool theory. A second reason, is if you're convinced other investment options are even worse. If you think German stocks are going to crash, a small guaranteed loss in a German bond is better than a large potential loss in a German stock. Third reason, savvy US investors can convert dollars into Euros, buy German bonds and hedge the currency risk using currency forwards that lock in the exchange rate. That currency transaction, German bonds with negative yields, actually result in positive yields for dollar-based investors.
02:02
And then finally, there's also a school of thought that investors in affluent countries, who expect to live a long time, have what's known as negative time preference. They value future consumption during retirement more than today's consumption. And so they're willing to accept a small negative interest rate to transfer their purchasing power into the future when they need it. So there are cases in which there are legitimate reasons to buy bonds with negative yields. But that still doesn't make them a good deal. You won't find any in Federated's Multi-Sector Bond Portfolios, because there's far too much risk that people may wake up one day and realize that this emperor has no clothes.
02:45
Bond prices are sensitive to changes in interest rates and a rise in interest rates can cause a decline in their prices. International investing involves special risks including currency risk, increased volatility, political risks, and differences in auditing and other financial standards. Past performance is no guarantee of future results. Views are as of 8/29/19 and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector. 19-40331 (9/19) Federated Investment Management Company
Tags Fixed Income .
DISCLOSURES

Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices.

International investing involves special risks including currency risk, increased volatility, political risks, and differences in auditing and other financial standards.

Past performance is no guarantee of future results.

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Federated Investment Management Company