Why people were buying 10 year bonds „yielding“ negative 0.50% just few years ago?

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  • Nominal vs. Real Rates:
    • When you see a bond yield, such as the yield on a 10-year U.S. Treasury bond, that’s typically a “nominal” rate. It represents the interest rate without adjusting for inflation.
    • However, what really matters to investors is the “real” yield—the yield adjusted for inflation. Real rates take into account the actual purchasing power of the money earned from owning the bond.
  • Why Nominal Rates Declined:
    • Nominal interest rates have been declining for quite some time. Factors like the global financial crisis and the COVID-19 pandemic led investors to seek safe-haven assets, including U.S. Treasuries.
    • As demand for Treasuries increased, nominal yields dropped to record lows.
  • Inflation Expectations and Real Yields:
  • Who Bought Negative Yielding Bonds?
    • Foreign investors played a significant role. As the U.S. economy reopened, imports from other countries increased. Many of these exporting companies and countries bought U.S. debt to build up their foreign exchange reserves.
    • Additionally, while nominal yields were low in the U.S., they were even lower in other parts of the developed world. Foreign investors found U.S. Treasuries relatively attractive due to their (relatively) higher yield1.
  • Economic Implications:
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In summary, negative bond yields occur when investors are willing to accept a guaranteed loss in real terms due to various factors, including global economic conditions and relative yield differentials across countries3. It’s a fascinating phenomenon that challenges traditional expectations!

h/t AI

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