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."
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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.
Potential beneficiaries
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.
"At current levels this is only relevant for the German curve," Nomura said in a note Friday, noting that only around 2.5 percent of the outstanding bonds within the ECB's targeted bucket is trading at or below negative 0.20 percent.
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"The risk that the Bundesbank will have to move purchases further out the curve has certainly increased, which has put flattening pressure on the curve," Nomura said. "This triggered already a pronounced bull flattening of the Bund curve driven by scarcity concerns in the ultra-long end."
Nomura expects the Bundesbank will need to buy bonds maturing in 2020 -- which is yielding around negative 7-8 basis points -- or beyond.
Don't sweat the ECB
To be sure, some expect the market's demand for negative-yield bonds won't be affected by the ECB's limits.
"The real reason investors continue to buy those bonds is they have no better alternative," Steve Goldman, managing director at fixed-income manager Kapstream Capital, said. "They're worried about losing more money somewhere else, so this is the least-worst alternative."
Despite the ECB raising its economic growth forecasts on Thursday – to 1.5 percent for 2015, up from December's forecast for 1 percent – Goldman is pessimistic on Europe's outlook.
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"The markets are telling you [via negative yields] it's a very ugly story in Europe and it's not going to get better anytime soon," he said.
Mind the territory
There's another reason the ECB's restriction may not impact the negative-yield trade too much: many of Europe's negative-yield bonds are outside the ECB's purview entirely.
"Yields are most negative outside the euro-area, in Switzerland and Denmark," Julian Jessop, chief global economist at Capital Economics, said in a note Wednesday, before the ECB announcement. He noted that official interest rates in both countries have been set at negative 0.75 percent.
Buying those bonds can be a foreign-exchange play, he noted, with traders hoping for the Swiss franc or the Danish krone to appreciate.
--Dhara Ranasinghe contributed to this article.
—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1