Bond Yields

Going Negative

Negative bond yields: A bridge too far for the ECB? Source: Mauritius Images
Negative bond yields: A bridge too far for the ECB?
  • Why it matters

    Why it matters

    The European Central Bank wants to force banks to lend more to help boost Europe’s struggling economy, but negative rates are hurting banks’ profit margins in the process.

  • Facts


    • The ECB lowered interest rates for bank deposits to -0.2 percent in June.
    • A massive €1.14 trillion government bond-buying program starts in March.
    • Banks, insurers and investment funds all have compelling reasons to purchase negative yield securities.
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Europe’s festering economic crisis has turned the bond world upside down.

Debtors are actually supposed to pay investors interest, not the other way around. But since June of last year, the yields of short-term government bonds worth €1.3 trillion, or $1.47 billion, turned negative in the euro zone.

Those especially affected are bonds from Germany, France, the Netherlands, Belgium, Finland and Austria. Essentially, investors are paying to park their money with euro zone countries with good creditworthiness.

The Royal Bank of Scotland has calculated that the pool of bonds already offering negative yields, or yields of less than 0.1 percent, is likely to grow.

“The yields could fall further, so in the foreseeable future we could have more than €1.6 trillion euro government bonds with negative yields,” said Alberto Gallo, head analyst at RBS.

That would be mean more than a quarter of the outstanding government bonds in the euro zone are seeing negative yields.

That may sound shocking, but according to experts, the explanation can be found at the European Central Bank. Since June of last year, the ECB has been charging banks that deposit their excess reserves with the central bank. The ECB lowered its interest rate for such bank deposits to -0.2 percent. Since then, these negative rates have been eating through the bond market.

And that’s exactly what the central bankers surrounding ECB President Mario Draghi want.

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