Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 324

What does a negative bond yield really mean?

It seems someone at the ASX must have read Graham Hand’s introduction to Firstlinks Edition 320, about the ASX bond price calculator not being able to handle a negative yield. Because now it can.

We see that for the 3% coupon bond maturing in March 2047, that a minus 1% yield equates to a bond price of $227.32. But does that seem reasonable?

How to understand this new world

Compare that to a price of $148.08 for a yield of 1%. And at a 0% yield, the price will simply be the sum of the future coupons plus the face value of $100 at settlement, being $182.50. Therefore, a price of $227.32 for a minus 1% yield would appear to pass the sensibility test (which can also be verified in a simple spreadsheet).

Negative-yielding debt is globally prevalent, but particularly in Europe, with Germany recently selling over 800 million euros worth of 30-year bonds yielding an average minus 0.11%. Investors are paying the government to hold their debt. For 30 years!

This phenomenon is foreign to many investors, and they are finding it hard to come to grips with what a negative yielding investment actually means. So let’s try and rationalise it.

First, we understand a positive yield to mean that in recompense for locking away some capital, we receive payment in the form of interest from the deposit-taker. A negative yield implies the opposite. That is, we pay the deposit-taker some interest for looking after the capital.

To illustrate and for simplicity, consider a zero coupon, 10-year bond with a face value of $100. That is, depending on the yield, an investor pays an amount today to receive $100 in 10 years’ time, with no other income prior to maturity.

In the case of a positive yield of 1%, the price today of that bond is the present value of the redemption amount, discounted at the yield to maturity of 1%. So $100 payable in 10 years will have a current price of $90.53. That is, $90.53 invested today earning 1% p.a. will accumulate to $100 in 10 years.

If the yield was 0%, then the present value today is simply the $100 redemption amount. And if the yield was minus 1%, then the present value of $100 payable in 10 years will be $110.57. 

Present values with negative yields

But what does a present value of $110.57 at minus 1% really mean? It means that to have someone hold $100 for a period of 10 years, we must pay them interest of $10.57 today. That is, interest required for the whole period is charged up front.

Another way to think of this transaction is from the bond issuer’s point of view. To look after $100 for 10 years, they ask for $110.57 today, being what $100 would accumulate to in 10 years, at an implied interest rate of 1%. In effect, the bond issuer requires at the outset, the redemption amount accumulated at a rate approximately equal to the bond yield paid by the investor. 

To summarise, with negative yields, the investor pays more today than the amount redeemed at maturity. Which makes sense intuitively if we think that the bond issuer needs more than $100 today, if that amount is going to run down over time at negative market interest rates, and $100 must be paid back in 10 years' time.

The logic also holds for exchange traded bonds that pay regular fixed interest amounts through to maturity, such as the 3% coupon, March 2047 bond highlighted above. In fact, using the accumulation approach for that bond, accumulating the future coupons plus the $100 redemption to March 2047, at an interest rate of 1%, returns a value of $226.60. A good approximation to the price of the bond at a minus 1% yield, of $227.32.

Why does anyone invest at negative rates?

With some $17 trillion of negative yielding bonds now existing worldwide and growing, why would anyone invest in such debt? There are a number of reasons.

1. Scope for capital gains. If interest rates fall even further, bond prices rise.

2. Ride the yield curve. Assume a normal yield curve where the shorter the term, the more negative the yield. With the passage of time and all else being equal, holding a long-term bond will see the yield fall and the price rise. Therefore, capital gains are possible.

3. If deflation is expected. A negative 1% bond yield with negative 2% inflation, implies a positive 1% real return.

4. If liquidity is important. The highly liquid and cash-like bond market is usually preferable to holding a wad of cash.

5. It may be the best yield you can achieve without putting your capital at risk, with government bonds virtually risk-free.

We have a new world order when it comes to investment yields on government debt, and negative 10-year bond yields in Australia may not be too far away here. So we should at least try to make sense of a strange situation and adapt accordingly.


Tony Dillon is a freelance writer and former actuary. This article is gheneral information and does not consider the circumstances of any investor.


September 20, 2019

I don't care what spin is put on negative interest rates, IMO it's madness.

SMSF Trustee
September 22, 2019

Why stefy?

Is it madness for markets to price in a world economy unable to generate a positive rate of return on risk free capital when that's exactly what we see happening in so many economies? Is it madness to assume that the failure to generate inflation will continue and that a negative nominal rate of return might actually be a half decent real return over the next ten years or so? Is it madness to see that monetary policy has not yet been able to find a level that drives economic growth and inflation, thus resulting in most people acknowledging that zero cash rates are around for a while yet?

I don't think so.

Just because it hasn't happened before doesn't make it 'madness'. Just because we don't like it or enjoy it doesn't make it madness. Madness would be to put your head in the sand and deny that it's happening.

Tony Dillon
September 20, 2019

"In effect, the bond issuer requires at the outset, the redemption amount accumulated at a rate approximately equal to the bond yield 'paid' by the investor. "

Just to expand on this statement for the mathematically inclined.

It can be shown that taking the present value of a cash flow stream at an interest rate of i%, is equivalent to accumulating that cash flow at a rate equal to -i / (1 + i)%.

And when i is of sufficiently small magnitude, (1 + i) is close to 1, therefore -i / (1 + i) is close to -i.

Now when i = -1%, the present value of $100 payable in 10 years time equals $100 / (1 + (-0.01))^10 = $110.57.

If we instead accumulated at a rate equal to and opposite in sign to the -1% yield, that is at 1%, we accumulate to $100 x (1+0.01)^10 = $110.46. Which is a good "approximation" to the present value at i = -1%.

And accumulating $100 for 10 years at -(-0.01) / (1 + (-0.01)) = 0.010101, equals $100 x (1+0.010101)^10 = $110.57, exactly the same as taking the present value at i = -0.01.

September 19, 2019

Do we really need to get used to it, investing at a negative rate for 30 years? Better do a complete redesign of every retirement income forecast.

SMSF Trustee
September 22, 2019

James, if you haven't done that already you are way behind the eight ball. Yes, get used to it!


Leave a Comment:



What does the current yield curve tell us?

Why investors buy bonds at negative yields


Most viewed in recent weeks

How $200 billion is magically created

Australia is in a relatively good position to borrow $200 billion, with the RBA using printed money to buy bonds in the market. The long-term consequences are better than the alternative.

Howard Marks on 'Which way now?' - UPDATED

Howard Marks is the largest investor in the world in distressed securities. What does he think after checking the virus positives and negatives, and how much has he changed his mind in only a few days?

What are the possible economic effects of COVID-19 on the world economy?

In a widely-quoted scenario using estimated attack and fatality rates of coronavirus, about 0.07% of the population of the US dies. That's about 230,000 people, which the market is not ready for.

Note to Australia: be more French in the COVID-19 war

Andrew Baker is well-known as a superannuation consultant. Now working in the UK, he was caught in France with his family and is in lockdown. He worries Australian policy was too slow.

Welcome to Firstlinks Edition 351

The $130 billion wage stimulus is astounding in its generosity and scope. It's equivalent to the annual budgets for defence, education and health combined. A cafe owner told me a casual dishwasher who was paid $60 for two hours work a week now wants the $1,500 fortnightly payment. Shane Oliver exclusively explains where $200 billion will come from, and some longer-term consequences.    

  • 1 April 2020

The three key issues in the COVID-19 outlook

Hamish Douglass outlines the three main issues in the outbreak of coronavirus, with consequences which may change businesses and consumers forever. Will we face V-shape, U-shape or depression?

Latest Updates

The three key issues in the COVID-19 outlook

Hamish Douglass outlines the three main issues in the outbreak of coronavirus, with consequences which may change businesses and consumers forever. Will we face V-shape, U-shape or depression?

Investment strategies

Survey: the impact on you of COVID-19

Let us know how are you coping in the current crisis. How is your portfolio performing? Have we seen the stock market bottom? When will the crisis end? What does 'the other side' look like?


How to make up for lost time on COVID-19

Bill Gates warned the world in 2015 that we were not ready for the next inevitable pandemic, and we ignored him. The Washington Post has provided free access to his updated views.


The simple mathematics of social distancing

A simple check of the mathematics explains why social distancing is so important, and in the absence of a treatment or vaccine, the only way to stop COVID-19 becoming rampant.


One trillion and counting: is government debt a problem?

With about $350 billion of new government spending announced to combat COVID-19, the obvious question is whether Australia can afford it, especially when national income will fall rapidly.


Brace yourself for (bad) tax and super news

The previous austerity of the Coalition Government has been tossed aside to deal with COVID-19, but at some point, debt will be repaid. Are policies once considered off-the-table now a target?

Investment strategies

Hybrids throwing up opportunities … and risks

The GFC provided asset managers with a source of behavioural data they could only dream of. However, no amount of modelling can capture the full panic that some investors experience. 


Demographic change at the worst possible time

The missing piece in most analysts' views of the future of the stock market is demographics. The secular bull market until 2019 was driven by a generation that is now retiring and selling equities.  



© 2020 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use.
Any general advice or class service prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, has been prepared by without reference to your objectives, financial situation or needs. Refer to our Financial Services Guide (FSG) for more information. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.