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Japan's negative yield bond explained

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© 2016 AFP

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That means if they buy below-zero yield bonds now and sell them back to the BOJ at a later date when yields have gone up, they will make money.

That seems backwards. They can make money if the yield goes down further (= bond price goes up further).

It is exactly backwards, though given Agence France Presse's full-on Abe-cheerleading ever since he got elected, I am hardly surprised.

As you see, they will make money if the yield becomes even more negative than it is now; for example, selling it onward to a party who might otherwise be stuck buying a bond that yields -0.050%. They would pay above par for the bond and that difference would offset the -0.035% per year that the first bond buyer had been "paying" to hold it.

4 ( +4 / -0 )

Another shocker from AFP.

Why on earth would anyone do that?

The key point is that if you know someone else (like the BOJ) is going to buy the bond off you at an even bigger loss than what you are paying for, then you can still make money when you sell the bond on, rather than hold it to maturity.

But the BOJ’s negative interest rate has so far failed to have the desired effect of forcing banks to spend their cash

The ostensibly desired effect was to have them loan the cash, not spend it. No depositor expects their bank to spend their cash, they expect their bank to look after the money and eventually give the money back when requested.

However, the BOJ is the middle of a vast bond-buying scheme as part of a plan to stimulate the economy

That's the ostensible purpose, but it would seem the true purpose is to prevent the direct bankruptcy of the Japanese government.

That means if they buy below-zero yield bonds now and sell them back to the BOJ at a later date when yields have gone up, they will make money.

That seems backwards. They can make money if the yield goes down further (= bond price goes up further).

AFP should know the difference between the coupon rate and the yield of a bond. The yield has fallen below zero, but the coupon rate is still positive.

On the outstanding bonds that were issued before yields went negative, yes. If the MOF issues new bonds now though, they will be able to issue with a negative coupon perhaps?

2 ( +2 / -0 )

buy nz dollar , earn 3% interest over 5 years then wait for yen to fall below bought rate?

2 ( +2 / -0 )

With the negative compounding interest you will continually lose more on these negative bonds. As a speculator that really doesn't matter but as a long-term bond holder these "negative assets" are a hot potato of investing. =Very few normal investors will want to hold these negative compounding assets to full term.

Maybe Abe has new tax laws coming for these negative bond holders.

2 ( +2 / -0 )

But Japan’s yield is now negative?

That’s right, meaning anyone buying a bond (becoming a lender) has to pay for it.

For example, if an investor was to hand the government 100,000 yen ($875) for a 10-year bond at Tuesday’s -0.035 percent rate, it would actually cost him 3,500 yen, so he would only get back 96,500 yen.

AFP should know the difference between the coupon rate and the yield of a bond. The yield has fallen below zero, but the coupon rate is still positive.

1 ( +2 / -1 )

I am confused, somebody please tell me I am not alone.

100,000 yen at -0.035%, somehow ends up at 3,500 yen? what math genius has been working here?

If I were to get the Greek 10 year with the same kind of logic, would I get my money back with in ten fold?

Now I am not sure how bonds work, but I expect something like "100,000 * -0.035% = 35" as -0.035% is the same as multiplying by -0.00035 as 1 = 100% (note the '%' sign, in the article too)

1 ( +2 / -1 )

Kondriatov winter heading your way!

1 ( +1 / -0 )

uncharted territory, global depression in next 1-3 years possible. hold cash in top 3 currencies (dollars, euros, or yen). you heard it here first.

0 ( +0 / -0 )

BOJ Kuroda needs to bring out the Boozoka.

Firm & huge & fierce FX interventions with side benefit of building up more FX reserves for further strategic strength; it's free while the Yen is too strong. Kill 2 birds with 1 stone.

Huge increase in buying of EFT stocks limit.

The panic rout needs to be reversed. Element of surprise and punish speculators hard.

Economically continue to promote and make Japan the tourism centre of Asia. Japan can have 100 million tourists a year; a very big boost to the economy.

0 ( +0 / -0 )

= buy gold

-1 ( +2 / -3 )

Japan needs to spark inflation by taking bold and dramatic action!!! The answer is so incredibly simple... I am shocked that nobody as of yet has advocated for this! BOJ needs to take many wheelbarrows full of Japanese governent bonds to a public ceremony and set them on fire!!! The media would broadcast it for the world to see! This bold action, which retires Japanese public debt, is certain to spark the inflation that Japan so badly needs.

-1 ( +0 / -1 )

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