The government bonds issued by Germany in January 2012 had the unusual feature of having a negative yield. What does a negative yield imply?
Imagine the simplest bond possible. Suppose this bond pays its owner €1,000 in 1 year. Knowing this, the maximum price you'd be paying for this bond is clearly €1,000. Normally, you'd pay a lower price, say €960. In that case if you hold on to bond until it matures, you would realize a return of (€1,000 / €1960) - 1 = 4.17%, which is the bond's yield to maturity.
A negative yield suggests that you are actually paying more than €1,000 now in order to receive €1,000 in year. In other words, you are lending someone money knowing that the amount they'll return to you is less than what you lent. Yes, you're right. This is clearly unusual. What was going on with German bonds?
Due to the debt crisis in Europe, government bonds issued by Greece, Portugal, Spain and Ireland were considered to be pretty risky. Meanwhile, Germany had one of the strongest economies within the European Union. European investors who were desperate for safe assets showed a huge interest in purchasing German government bonds. It is this huge interest that pushed the prices of these bonds up to a level that caused the yields to become slightly negative (prices and yields move in opposite directions).
Due to the debt crisis in Europe, government bonds issued by Greece, Portugal, Spain and Ireland were considered to be pretty risky. Meanwhile, Germany had one of the strongest economies within the European Union. European investors who were desperate for safe assets showed a huge interest in purchasing German government bonds. It is this huge interest that pushed the prices of these bonds up to a level that caused the yields to become slightly negative (prices and yields move in opposite directions).
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