Why investors buy negative yield bonds

by

I enjoyed reading this premium article on negative yield bonds in the straits times.

But why do investors in Europe and Japan want to buy negative yield bonds? Imagine buying a bond, and instead of receiving coupons, I have to pay coupons instead. Why would anyone do that?

The most common answer is institutional investors such as insurance companies and pension funds, have to invest in bonds, even if the return is negative. I have never accepted this answer.

The better answer to me is that investors believe that if interest rates are cut, the bond prices will rise. Investors can then sell the bond for capital gain.

I observed that almost every SGD new corporate bond issue since Jan 2019 has risen in price soon after their launch. The current market is conducive for bonds and reits. I have listed some examples of these high yield SGD.

  • Thomson Medical 4.8% 2022
  • Credit Suisse 5.625% perp
  • Standard Chartered 6.375% perp
  • SPH 4.5% perp

These bonds are now trading about 102 currently. Instead of buying these bonds now, it may be a better idea to wait for new bond issues which are usually launched with a discount.

  • I'm a remisier with Maybank Securities, and as a bonds and REITs investor myself, I guide my clients to build resilient bonds and REITs portfolios. If you like to be guided, please open a trading account to become my client; It's free!