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US investors have looked with disbelief at nearly $ 17 trillion in negative yield bonds around the world, in a context of global economic concerns and a more loose monetary policy from central banks.
The financial theory of textbooks, itself, has difficulty explaining why investors might want to tie their money to a debt that, if maintained throughout its existence, would yield less than what was invested, Kathryn said. Kaminski, Portfolio Manager at AlphaSimplex.
Opinion: If the stock market is irrational, what do you call the bond market?
Nevertheless, according to analysts, investors and traders have reasons to buy bonds that yield less than zero. Here are some of them:
Carrier bags
Investors who pick up negative return bonds are betting on the value of the securities to keep on increasing, actually betting on the existence of other "bag holders".
While the European Central Bank is widely expected to revive its asset-purchase program, European bond buyers could rely on the central bank to stock in securities portfolios. negative.
Although investors who buy bonds at interest rates below zero actually pay the privilege of holding an investment, this cost can be more than offset if the price of the security rises.
In July, auction of 4 billion euros of 10-year German bonds
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sold at a negative yield of 0.26%, but at a price plus 102.6 cents the euro. The reference bund is now trading at 106.9 cents per euro, which means investors who have written off their debts at last month's auction would have gained about 4% of price increase.
"Everyone buys this stuff like crazy, because the system loosens too much money and that too much money goes to state bonds," said Jim Bianco, founder of Bianco Research, in an interview with MarketWatch.
In addition, market participants believe that it is unclear whether the purchase of fixed income securities pending further price increases remains a sustainable trend.
Assets secured
Market players claim that some of the holes are able to withstand the deterioration of the US economy and geopolitical tensions. When risk assets sell, the problem of negative returns on government bonds may be overshadowed by their proven ability to recover in times of market stress.
"This awareness of the importance of high income in fixed income portfolios has created a mini panic in the market," said Thanos Bardas, co-director of Neuberger's global investment grade division. Berman, pointing out that last week, all maturities of German Bunds are trading at negative returns.
Currency hedging
Negative returns do not mean negative income for some.
Unlike European and Japanese investors, US investors are often paid to hedge against currency fluctuations because US interest rates are much higher than in other developed markets such as Europe and Japan.
This is why US fund managers can still earn money by holding a European government bond with negative return. According to Jens Vanbrabant, Senior Portfolio Manager at Wells Fargo Asset Management, currency hedging can provide an additional 3% annualized return to US investors buying euro-denominated debt.
Roll down
Investors can also take advantage of lower-than-zero interest rates by taking advantage of the steep yield curve, which can still be steep, even for negative yield markets in Germany and Japan.
The yield curve represents the difference between short-term and long-term returns, with a steep curve indicating a significant difference.
For example, a trader can buy a 3-year negative yield bond and sell it after one year. Since debt prices move in the opposite direction of returns, the value of the 3-year bond should be greater than that of a 2-year bond, all other things being equal.
As long as the interest rates of the short-term bonds are more negative than those of their longer-term counterparts, the price of the long-term bond should increase as the latter approaches maturity. Michael Chang, rate strategist at Société Générale.
He warned that earning money by "reducing the yield curve" was only a short – term strategy and that traders had to sell the bond well before the end of the year. maturity because the security would only be traded at par at the end of the term.
According to Pimco, global debt investors have often used this tactic to capitalize on the meager earnings of the Japanese government bond market.
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