Thread by @Funter21510910

Germany, yesterday, issued a 30-year bond that offers negative yield (average yield of -0.11%).

This typically means that investors are paying German government to hold their debt. Why would investors invest in such a bond? Thread 1/8

The coupon set on these bonds (or Bunds, as they are called in Germany) is 0% i.e. the government will not pay any interest at all on these bonds.

In comparison, if GoI issues a 30 year bond today, the interest rate offered would be ~7%. 2/8

A negative yield of -0.11% means that an investor in this bond will pay 11 basis points per year to German Govt to borrow the sum i.e. an investment of Rs. 100 in these bonds would yield ~Rs. 97 in 30 years, a loss of ~Rs. 3. 3/8

It sounds stupid to make such an investment but there is a twist to the story. Investors of these bonds feel that negative interest rates would continue to dip for a prolonged period and that they will be able to sell the bonds in secondary markets at a profit. 4/8

Bond concept - if interest rates falls, the price of a bond appreciates. The expectations of the investors are not misplaced. ECB is expected to cut interest rates when it meets next and may also announce buying back of bonds - measures which would bring down interest rates. 5/8

The German government had planned to sell 2 billion euros worth of these bonds but managed to attract only 8 million euros worth of investments (41.2% of planned sales). This is not bad given that it was a first for any country. 6/8

With negative interest rates in Europe and Japan, Governments in these regions would look to issue more and more longer maturity bonds. This is ideal. What else could a Government have dreamt of? -- Borrowing more and paying less at zero interest cost. 7/8

Interestingly, investors in Europe and Japan are flocking to buy U.S. T-Bills which are still in the positive yield territory. As a result, even the U.S. T-Bill yields are falling. One wonders if international cooling-off of yields would have an impact on Indian bond yields. 8/8

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There is a typo. The Investments made amount to 824 million euros and not 8 million euros.

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