There is rising demand for Chinese negative yield bonds amidst of COVID Pandemic.
What are negative-yield bonds?
They are debt instruments which pays the investor a maturity amount lower than the purchase price of the bond.
Investors buy them during times of stress and uncertainty to protect their capital from significant erosion.
Why is there a huge demand from investors across Europe?
A 10-year and 15-year bond gives positive return in China whereas interest rates in Europe has dropped significantly.
As against minus —0.15% yield on the 5-year bond issued by China, the yields offered in safe European bonds are much lower, between –0.5% and —0.75%.
China is one country that is set to witness positive growth (GDP expanded by 4.9% in the third quarter of 2020) when large economies are facing a contraction in their GDP for 2020-21 in these challenging times.
China demonstrated that it has controlled the spread of a second wave of Covid-19 cases when Europe, US and other parts of the world are still suffering.
What is the key factor driving this demand?
After the pandemic global central banks injected massive amount of liquidity which shot up the prices of various assets including equities, debt and commodities.
Investors wish to park their money in negative-yielding government debt for the purpose of hedging their risk portfolio in equities.
The fresh wave of the Covid-19 pandemic can lead to further lockdown in the economies( new US government may impose), which can push interest rates down, yields reduces further, and leading to profits for investors.
