What it means
A bond pays regular interest, called the coupon, and returns the face value at maturity. The yield is the annual return an investor earns from buying at the current price and holding to the end.
When prices are driven high enough, the total future cash falls below the cost of the bond and the yield turns negative. Why would anyone accept this?
Large institutions such as banks, pension funds and insurers sometimes must hold safe assets, and a government bond can be a safer place than a bank vault or an uninsured deposit. Investors may also expect deflation, where prices fall and a small nominal loss still preserves purchasing power, or they may plan to sell to someone else at an even higher price.
Central bank policy is a major driver. When a central bank buys bonds in large volumes or sets its own deposit rate below zero, yields across the market can fall below zero.
The effects spread to corporate borrowing, mortgage rates and the returns on cash, and savers may find it hard to earn anything on safe deposits. For a business, negative yields change financial planning because pension liabilities are measured using discount rates (rates used to convert future payments into today's value), and lower rates make those liabilities larger.
Companies with spare cash can face charges for holding balances, although borrowing can become unusually cheap. Finance teams therefore review hedging, pension funding and cash management policies together.
Negative yield does not usually mean the coupon is negative. Most bonds with negative yields still pay a small coupon or none at all, and the loss arises because the investor paid more than the face value at the start.
There are limits to this logic. A negative yield is a nominal figure, so after inflation the real return can be even worse, or in some deflationary periods better.
Investors should also remember that a bond sold before maturity can produce a gain or loss depending on how yields move afterwards.
In practice
Real-world examples.
Example
A pension fund must hold a set share of its assets in government bonds for regulatory reasons. It buys ten-year bonds with a slightly negative yield because alternatives such as bank deposits carry charges or credit risk. The trustees accept a small certain loss in exchange for security and liquidity.
Example
A multinational company with $50,000,000 of surplus cash buys short-term government bills at a yield of -0.5%. The loss of $250,000 over the year is less than the cost the bank would charge for holding the cash.
Example
A homeowner with a variable mortgage sees the benchmark rate fall below zero. The lender cannot reduce the rate below zero, so the borrower's repayment falls only as far as the lender's floor. The bank explains that its own funding costs do not fall below zero in the same way.
Formula
Calculation
For a bond with no coupon: Yield = (Face value / Price)^(1 / Years) - 1
Worked example: an investor buys a one-year zero-coupon bond with a face value of $1,000 for $1,020.
Yield = ($1,000 / $1,020) - 1 = 0.9804 - 1 = -0.0196, or about -1.96%
The investor pays $1,020 and receives $1,000, a guaranteed loss of $20.
For a two-year bond bought at the same price, the annual yield is the square root of 0.9804 minus 1, which is 0.9901 - 1 = -0.0099, or about -0.99% a year.Case study
Seen in the real world.
Lakeshore Insurance is an illustrative, fictional insurer that holds a large portfolio of government bonds to match its long-term obligations. When yields on its bond market fell below zero, the investment director faced a dilemma.
Buying new bonds meant accepting a guaranteed small loss, while holding cash would incur bank charges and credit risk. The committee decided to invest part of the portfolio in highly rated corporate bonds that still offered a positive yield, and to accept slightly higher risk within strict limits.
In this illustrative story, the actuaries also revised their discount rates, which increased the measured size of the company's liabilities. The board discussed the trade-offs openly and reported them to the regulator. They also set a ceiling on the share of the portfolio that could be held in lower-rated debt.
Watch out
Common mistakes.
- Believing a negative yield means the issuer charges negative interest on the coupon, when it normally reflects a high purchase price.
- Thinking nobody would buy such a bond, when regulatory needs and safety demands can justify it.
- Forgetting that real returns also depend on inflation.
Questions
People also ask.
Can a corporate bond have a negative yield?
It can, particularly for very strong issuers when central bank buying pushes prices up, but it is more common with government bonds. Investors should check which market and maturity a quoted figure refers to.
Does a negative yield mean I will lose money?
If you buy and hold to maturity, yes, you will receive less than you paid, but if you sell earlier at a higher price you could make a profit.
How does a negative yield affect borrowers?
It usually signals low borrowing costs across the economy, though lenders may still keep some floors on the rates they charge.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related