Syllabus Section: Economy

WHY IN NEWS?

Last week, China sold negative-yield debt for the first time, and this saw a high demand from investors across Europe.

NEGATIVE-YIELD BONDS

• These are debt instruments.

• It offer to pay the investor a maturity amount lower than the purchase price of the bond.

• These are generally issued by central banks or governments, and investors pay interest to the borrower to keep their money with them.

REASON FOR HUGE DEMAND

• China’s 5-year bond was priced with a yield of –0.152%, and the 10-year and 15-year securities with positive yields of 0.318% and 0.664%.Positive returns are a big attraction at a time when interest rates in Europe have dropped significantly, even against minus —0.15% yield on the 5-year bond issued by China, the yields offered in safe European bonds are much lower, between –0.5% and —0.75%..

• While the majority of the large economies are facing a contraction in their GDP for 2020-21, China is one country that is set to witness positive growth in these challenging times: its GDP expanded by 4.9% in the third quarter of 2020.

• While Europe, the US and other parts of the world are facing a second wave of Covid-19 cases, China has demonstrated that it has controlled the spread of the pandemic and is therefore seen as a more stable region

FACTOR DRIVING THIS DEMAND

• Massive amount of liquidity injected by the global central banks after the pandemic began that has driven up prices of various assets including equities, debt and commodities.

• Investors could also be temporarily parking money in negative-yielding government debt for the purpose of hedging their risk portfolio in equities.

• Global central banks have injected an estimated more than $10 trillion of liquidity through various instruments in the financial system — which is finding its way into various assets in the economy.

 

Source : Indian Express