Market Overview

Why Would Anyone Buy A Negative Yielding Bond? Simple: To Earn A Profit

Why Would Anyone Buy A Negative Yielding Bond? Simple: To Earn A Profit

Money managers who may be required to allocate a certain portion of cash in fixed income investments are faced with a simple problem: There are few opportunities where bond yields are attractive, let alone yielding a positive return.

According to a CNBC report, large fund managers, such as BlackRock, aren't deterred. The firm's chief investment officer and co-head of global fixed income was quoted by CNBC as saying during a media roundtable event that the company does buy negative rate corporate bonds.

In other words, BlackRock is essentially entering a losing investment with full knowledge off the bat.

Related Link: Another Catalyst For EM Bond ETFs

He explained that the "only reason" why anyone would buy a negative-rate bond is if "you think it's going to go more negative."

CNBC noted that as bond yields fall into further negative territory, their prices technically rise. As such, a money manager like BlackRock — in theory — could sell a negative-yielding bond for a profit.

And now the follow up question: Who would buy a bond that is yielding an even steeper negative rate? The answer: Central banks.

For instance, the European Central Bank has been buying government bonds since March 2015 and even expanded its purchases in June of this year to include corporate bonds.

By spending $90 billion a month, the ECB — as of last week — now holds $1 trillion worth of bonds. As such, fund managers looking to sell bonds for a profit "is almost guaranteed" to find a buyer.

Finally, CNBC stated that the median 10-year yield for investment-grade sovereign issuers was just 1.17 percent, down from 3.87 percent as of July 2011.

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