The number of primary market transactions with a yield below zero have been small and mostly limited to shorter- dated bonds. In only one country, Japan, have 10 year bonds been sold at negative yield in a primary market transaction. Now there is another. Germany issued zero coupon 10 year bonds at a yield-to-maturity of -0.05% during the week. The price investors paid for these bonds will exceed the face value received ten years from now. Buyers either believe the yield will fall further and the bonds will increase in value or they do so in the belief deflation will accelerate over the life of the bond.
In early May we published a short list of countries with negative yielding bonds and there were ten countries in the list. All of them are European except for Japan. While many of those countries’ bonds have been trading on secondary markets at negative yields for some time now, 10 year bonds get more attention as they are used as the benchmark yield for all sorts of assets. Not just in the fixed interest markets but also in the equity and property markets. So when the 10 year yield goes negative more people take notice. Japan’s economy has been stagnating since the early 1990s and to some degree a negative yield for longer-term bonds has been viewed as an aberration particular to that country but bonds markets are increasingly predicting the “Japanfication” of Europe.