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  • 00:00:00,000 --> 00:00:01,600 Hello.

  • I'm here to make you an offer.

  • You lend me £100.

  • And I will pay you back £90 in 10 years' time.

  • So yes.

  • You lose £10 on my offer.

  • It doesn't sound like a good investment at all, does it?

  • But this type of arrangement has become strangely normal

  • in the markets, particularly in Japan and Europe.

  • So how did things get so topsy turvy?

  • Let's start with the basics.

  • When companies or governments need to raise money

  • they have two options.

  • Governments can issue bonds.

  • And companies can - on top of that

  • - also issue shares to investors.

  • But what we're interested in are bonds.

  • They're a form of debt that can last over

  • different periods of time, from a few weeks to several decades.

  • And unless something goes seriously wrong,

  • you will get the full amount that you have invested.

  • So this is how it works.

  • The issuers of the bonds will make regular interest payments

  • to those that hold them over their lifespan.

  • This fixed rate of return investors

  • receive on a bond is called the coupon.

  • On top of this, there's an extra component,

  • this payment - as a proportion of the price

  • - is called the yield.

  • 00:01:14,640 --> 00:01:18,570 It's the price of the bond changes so does the yield.

  • The lower the price goes, the higher the yield rises.

  • And the higher the price goes, the lower the yield falls.

  • You get the idea.

  • Now a negative yield is the opposite.

  • It means investors are receiving less money than they originally

  • paid.

  • And what is so topsy turvy in the markets today

  • is that roughly a fifth of the global bond market

  • now trades at negative yields.

  • So why is this happening?

  • Let's go back a bit.

  • In the last decade or so, developed economies

  • have suffered from low growth and low inflation.

  • So to encourage people to spend more money,

  • central banks have been reducing interest rates

  • and injecting money into the economy

  • through quantitative easing, or QE,

  • to make individuals like us less motivated to keep money stored

  • in our bank accounts and instead spend it or put it

  • in riskier assets.

  • And the same is applied to the banks.

  • The European Central Bank, for example,

  • now charges other European banks nearly half a per cent interest

  • to hold their money in their deposits.

  • Because it wants banks to lend their capital out

  • into the economy rather than just sitting on the couch.

  • So far we've been talking about ordinary people

  • like you and me.

  • Now let's move on to investors, a particular subset

  • - investors with loads of money to spend.

  • If you were one of these investors surveying

  • the markets right now, this is what you'd see.

  • Bond prices have been skyrocketing.

  • And that's happening because investors still

  • see bonds as some of the safest assets

  • when the economic outlook is poor.

  • And so they have been buying them, as well as central banks.

  • And as the bonds get more expensive,

  • the returns become much lower.

  • The prices are now so high the yields in a number of countries

  • - such as Austria, Belgium, Denmark, Finland, France,

  • Germany, Japan, the Netherlands, and Switzerland

  • - have gone below zero.

  • So investors are certain to get back less than they

  • paid if they hold the bond to maturity.

  • So why hold these bonds at all?

  • In this topsy turvy world, issuers of debt

  • are now being paid to borrow.

  • And the investors, or buyers of bonds,

  • are paying cash to these borrowers, companies,

  • and governments instead of receiving an interest payment.

  • But despite the strange world for investors, as we said,

  • bonds are seen as one of the safest

  • investments on the market.

  • Because their returns have been very reliable

  • they're at the heart of most portfolios.

  • Government bonds, in particular, are considered very safe assets

  • because governments are reliable borrowers.

  • The owners of these bonds, or gilts,

  • can also buy and sell them in what

  • is called a secondary market.

  • This makes these bonds very liquid,

  • to continue the financial jargon.

  • Of course, bonds are only safe investments

  • if their rates are positive and above the rate of inflation.

  • Otherwise, investors won't be earning

  • any money, as is happening with bonds with negative yields.

  • And that has kicked off a very active debate

  • about whether government bonds should be considered

  • as safe havens at all.

  • In fact, some investors are refusing

  • to own negative yielding debts for this reason.

  • But for really big investors - such as banks,

  • insurance companies, and pension funds - they have no choice.

  • They have to own bonds, even if the financial return

  • is negative.

  • This is because they have to make

  • sure their funds are liquid.

  • And when borrowing, they can also

  • pledge bonds as collateral.

  • So this is where we are now.

  • But what next?

  • It depends.

  • If low growth, trade tensions, and political uncertainty

  • continue investors are likely to continue to flock to safer

  • assets, like government bonds, thereby driving up prices

  • and keeping yields on the negative.

  • In fact the volume of negative yielding bonds

  • has started to fall.

  • But some market experts still believe

  • that until at least 2022, about a fifth of sovereign bonds

  • will have a negative yield.

  • But back to you, in this topsy turvy world,

  • how does this affect you?

  • In the short term, it seems that negative yields can actually

  • get the economy moving.

  • But over the long term, negative yields could mean lower returns

  • on pension funds, meaning workers

  • could be forced to save more and work longer.

  • We are already seeing signs of this,

  • especially in eurozone countries where people have become

  • concerned about not receiving positive returns

  • and have started to set more money aside for the future.

  • The central banks believe their strategy can help the economy.

  • But their critics warn that negative yields could slow down

  • the economy even more.

  • And the central banks could find themselves

  • trapped by their own policy of cutting

  • borrowing rates below zero.

00:00:00,000 --> 00:00:01,600 Hello.

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A2 US FinancialTimes negative yield bond central economy

Why buy negative yielding bonds? FT

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    洪子雯 posted on 2020/02/27
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