Title: What Are Negative-Yielding Bonds? What Happens When Yields Go Negative
Headings: What Are Negative-Yielding Bonds? What Happens When Yields Go Negative
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In uncertain markets, investors often seek fixed income for the relative safety that bonds provide versus riskier assets like equities. But with interest rates declining since the 80s, bond yields have come under pressure, even falling below zero in some markets. Led by Japan and Europe, about 27% of the global bond market trades at yield below zero according to Bloomberg. What are negative-yielding bonds? Here's what happens when bond yields go negative. Key factors that affect bond yields
Central banks use monetary policy to support economic growth
In 2014, the European Central Bank (ECB) was the first major central bank to lower a key interest rate into negative territory. Essentially, the goal was to stimulate economic growth by lowering the cost of debt to stimulate borrowing. Simultaneously, banks were penalized for holding too much cash at negative rates. In 2020, the Federal Reserve stepped in to support the economy during the Covid-19 pandemic by setting the target Federal Funds rate to zero. While it’s widely believed that the Federal Reserve wouldn't follow the European Central Bank in setting below zero target rates, that doesn’t mean bond yields can’t go negative.