Negative-yield bonds – or paying for the privilege of lending money – have provided some surprising profits, but the trade faces new wrinkles from Europe's quantitative easing (QE) foray.
In essence, because bond prices move inversely to yields, the trade is often about buying negative-yield bonds at a high price and selling them higher, but price gains may have entered an end-game. In announcing the details of its plans to begin buying sovereign bonds, the European Central Bank (ECB) said Thursday it will limit purchases to paper yielding no less than negative 0.2 percent, in line with its deposit rate.
"They're putting a number on it," said Mark Matthews, head of research for Asia at Julius Baer. "The ECB is] the marginal buyer, so nobody else is going to buy it lower than them if that's their final price; they're the market maker."
Across the euro zone, yields on many short- to mid-dated bonds have turned negative in recent months. Germany's two-year and three-year Bund yields, for instance, are trading around the negative 0.2 percent threshold, with the curve not turning positive until the seven-year Bund. France's two-year bond is trading around negative 0.15 percent.
But while demand for these shorter-dated negative-yielding bonds may take a hit from the ECB's threshold, longer-dated positive-yielders could benefit. The ECB said its bond-buying would target maturities from two to 30 years.