In July of 2016, the Canadian Imperial Bank of Commerce (CIBC) became the first non-European bank to sell European denominated negative-yield bonds. They were sold at a rate of -0.009% with a six year maturity, and had a demand which was twice as large as the offering. This left speculators with divided opinions on whether or not they were worth the investment.
Staff Writer: Rachael Chan
Before this offering, nominal interest rates on bonds had never gone below zero in Canada. Normally, purchasing a bond means that the amount of money received back from the bank would be nominally greater than the amount originally paid for it. In the case of these negative yield bonds, however, investing in them is equivalent to paying “$100.054 for the right to get $100 back from the bank in 2022” (CBC). So why pay for the right to receive less than you originally invested?
What many people overlook is the fact that these are foreign-denominated bonds, and a change in the exchange rate affects the total yield of the security. According to an article published by BBC, if the value of the Euro rises enough in comparison to the Canadian dollar, the increase in foreign exchange received can make the investment a profitable one. As a result, people are essentially betting on the value of the Euro. Fortune.com takes a different stance, arguing that negative yield bonds are low risk securities to invest money in, even if that means having less money after the bonds mature. Keeping money stored at home would run the risk of burglary and will likely require the purchase of a safe or security system.
In the end, it comes down to weighing differing options. As with all types of investments, bonds offer alternatives with varying risk and reward profiles. While these Euro-denominated bonds do not offer a guaranteed positive nominal return, unlike all other Canadian bonds, there is a chance that the Euro’s value will rise significantly over the next six years, making these bonds very profitable. To those who would rather not risk the foreign currency bet on a negative yield bond, or who would like to retrieve and deposit funds at will, there may be better options.
Evans, Pete. “CIBC Sells Negative-yield Bonds for 1st Time.” CBCnews. CBC/Radio Canada, 20 July 2016. Web. 29 July 2016.
Orestes, Jason. “What Is the Rationale Behind Owning a Negative-Yield Bond?” TheStreet. 11 Feb. 2015. Web. 29 July 2016.
Tseng, Nin-Hai. “How to Make Money on Negative Yields.” Fortune. 11 Jan. 2012. Web. 29 July 2016.
Walker, Andrew. “Why Use Negative Interest Rates?” BBC News. 15 Feb. 2016. Web. 29 July 2016.