China's Negative Yield Bonds: Explained!

China has sold its first negative-yielding sovereign bond, a euro-denominated trade that drew a high demand from European investors facing record-low returns across the region.

A bond is a fixed income instrument that represents a loan made by an investor to a borrower with the intention of decent return through interest.

Usually, the governments and corporates issue bonds, which are called government bonds and corporate bonds, respectively, to fund the infrastructure and other projects. In India, government bonds are issued by the Reserve Bank of India. In the USA, the UK, and India, bonds are referred to as Treasury, Glits, and Government Securities, correspondingly.

What has happened to the Chinese sovereign bond?

When a country sold its bond internationally, it is called a sovereign bond, which is backed by the respective government that offers it. China has sold its first negative-yielding sovereign bond, a euro-denominated deal, that drew a high demand from European debt investors facing record-low returns across the region. The offering drew about  €18 billion worth of orders for  €4 billion of bonds as yields across Europe are even lower. There were three different bonds offered by China with a 5-year, 10-year, and 15-year yield, which would be giving returns of -0.15%, 0.31%, and 0.66%, respectively. The 5-year bond was priced with a negative-yield.

The negative bond offers to pay a lower amount than a purchase price. Investors pay interest to the borrower to keep their money with them.

Why do investors buy them?
The negative-yield bonds attract investments during times of uncertainty when investors look to protect their capital from uncertainties. The same happened during the Covid-19 pandemic as economic uncertainties were there across the globe, and investors were looking for a relatively better-yielding debt instrument to safeguard their respective interests. As yields offered in the European market were comparatively lower, investors opted for the Chinese one with a -0.15% return.

Moreover, as the majority of the large economies of the world facing a massive contraction in the GDP, China is the only country to be positive during the same time with decent growth. The Global central banks have injected an estimated $10 trillion of liquidity through various instruments in the financial market, which is finding a way into different assets in the economy.

Credits: Financial Times, Study IQ Education by Ankit Agrawal.