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 to enjoy your retirement

Amid thousands of comments, tips include developing interests to keep occupied, planning in advance to have enough money, staying connected with friends and communities ... should you defer retirement or just do it?

Results from our retirement experiences survey

Retirement is a good experience if you plan for it and manage your time, but freedom from money worries is key. Many retirees enjoy managing their money but SMSFs are not for everyone. Each retirement is different.

A tonic for turbulent times: my nine tips for investing

Investing is often portrayed as unapproachably complex. Can it be distilled into nine tips? An economist with 35 years of experience through numerous market cycles and events has given it a shot.

Rival standard for savings and incomes in retirement

A new standard argues the majority of Australians will never achieve the ASFA 'comfortable' level of retirement savings and it amounts to 'fearmongering' by vested interests. If comfortable is aspirational, so be it.

Dalio v Marks is common sense v uncommon sense

Billionaire fund manager standoff: Ray Dalio thinks investing is common sense and markets are simple, while Howard Marks says complex and convoluted 'second-level' thinking is needed for superior returns.

Fear is good if you are not part of the herd

If you feel fear when the market loses its head, you become part of the herd. Develop habits to embrace the fear. Identify the cause, decide if you need to take action and own the result without looking back. 

Latest Updates


The paradox of investment cycles

Now we're captivated by inflation and higher rates but only a year ago, investors were certain of the supremacy of US companies, the benign nature of inflation and the remoteness of tighter monetary policy.


Reporting Season will show cost control and pricing power

Companies have been slow to update guidance and we have yet to see the impact of inflation expectations in earnings and outlooks. Companies need to insulate costs from inflation while enjoying an uptick in revenue.


The early signals for August company earnings

Weaker share prices may have already discounted some bad news, but cost inflation is creating wide divergences inside and across sectors. Early results show some companies are strong enough to resist sector falls.


The compelling 20-year flight of SYD into private hands

In 2002, the share price of the company that became Sydney Airport (SYD) hit 80 cents from the $2 IPO price. After 20 years of astute investment driving revenue increases, it sold to private hands for $8.75 in 2022.

Investment strategies

Ethical investing responding to some short-term challenges

There are significant differences in the sector weightings of an ethical fund versus an index, and while this has caused some short-term headwinds recently, the tailwinds are expected to blow over the long term.

Investment strategies

If you are new to investing, avoid these 10 common mistakes

Many new investors make common mistakes while learning about markets. Losses are inevitable. Newbies should read more and develop a long-term focus while avoiding big mistakes and not aiming to be brilliant.

Investment strategies

RMBS today: rising rate-linked income with capital preservation

Lenders use Residential Mortgage-Backed Securities to finance mortgages and RMBS are available to retail investors through fund structures. They come with many layers of protection beyond movements in house prices. 



© 2022 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 ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). 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.