Explaining Negative Bond Yields

What are negative bond yields?
It's actually a simple answer once you understand what a bond is and its yield.
There are many specifics on what exactly a bond is and various forms they can take; I may go into more detail in another post at some point, but at the moment we will only be looking at government bonds and I will be simplifying many aspects.

When a government wants to buy/do something, but they don't have the money to pay for it, and they don't want to raise taxes (public backlash) or print money (inflationary), instead they choose to ask for money and promise to pay back the money, with interest at a future date, this is called a bond and the interest paid back is the yield.
This makes the answer to what a negative bond yield obvious, it's when you lend money and are given less than what you had given, but that brings up another question.

Why would you ever buy a bond with a negative yield?
To that question let me ask another,
What determines a bond's yield?
There are many aspects that can affect the yield from the federal interest rate, credit rating, time to maturity, etc, but to oversimplify a bond's yield is determined by two main things the interest rate and the public.
The base interest rate is the starting yield of the issued bond determined by the government; if nobody wants to buy the bond, the yield will go up until it reaches a point that investors begin purchasing them; inversely if everyone is trying to buy it, the yield falls.
This points towards the answer, a bond's yield goes negative when there are so many people that want to buy it, that it causes the yield to fall below zero.

Again, this brings up another question,
What pushes an investor to buy a bond that would yield them negative returns?
This is when we begin to tread into more complex topics that would warrant their own posts; I will provide some quick examples of when a negative yield bond occurred (possibly another post that goes in-depth for each example in the future),

- Japan, after Japan's asset bubble popped in the 1990s, Japan faced deflation and low growth. The central bank lowered interest rates to near-zero in an attempt to stimulate economic growth; in 2016, setting a negative interest rate.
- Eurozone, in 2009 the Eurozone crisis begins, money flowed from risky European countries to safer assets, such as German and French bonds, pushing down their bond yields and raising yields in riskier countries. In response, the European Central Bank (ECB) implemented negative interest rates to fight deflation and help lower bond yields of affected countries.
- Switzerland, despite not using the Euro as its currency, money would flow into Swiss bonds in response to the Eurozone crisis, viewed as an incredibly safe asset. This had the effect of pushing up the value of the Swiss franc, causing Swiss exports to become less competitive as it began to be more expensive for other countries to buy from Swiss companies. In an attempt to lower the value of its currency, they implemented negative rates to discourage money from flowing in.
- Covid-19, during the pandemic the stock market and economy crashed and investors wanted a safe place to put their money in this uncertain time; this made government bonds incredibly attractive, alongside governments cutting rates and the government-backed bond buying to help stimulate the economy, this caused bond yields to crash and in some cases go negative.
- Switzerland (Again), during Covid-19, Switzerland did not print money, buy back bonds, or increase the money supply in the same way that other countries had done. This helped fight off inflation that other countries struggled with, but as a consequence further pushed the perception of Swiss currency and bonds as being safe assets, strengthening the Swiss franc and Swiss bonds having the lowest yields in the world and the only bonds that will occasionally fall below zero into negative yields.

There are more factors for why a bond may go negative, but broadly the reasons are,
- Government attempts to stimulate their economy
- Fear pushing investors into safer assets

Of course, these are not the only reasons, and I will further explore the intricacies in future blog posts.
Once those posts are made I will link them below, and if you have any questions, complaints, or corrections, send them to my email, jovanycardozaaguilar@gmail.com