Negative Yielding Bonds Turn into Punishment Bonds

After peak negative-yield-absurdity in August, bond prices fell – the “bond bloodbath” – and the mountain of bonds with negative yields has plunged by $5 Trillion, or by 30%, despite rate cuts.

By Wolf Richter of WOLF STREET.

The 10-year US Treasury yield rose on Friday to 1.94%. That’s still very low, and below inflation as measured by core CPI (2.4%), but it’s up nearly 50 basis points from the lows at the end of August. During this time, the Fed has cut its interest rate target twice, by a total of 50 basis points, and short-term Treasury yields have fallen by about that much. With the one-month yield now down to 1.56% and the 10-year yield up at 1.94%, the yield curve has un-inverted and steepened.

US debt isn’t the only place where long-term yields have been rising despite major central banks’ action or at least verbiage on the rate-cut and QE side. The rise in long-term yields despite ultra-low or negative shorter-term yields has reverberated around much of the world.

When yields rise, bond prices fall, and what has been going on has been described as “bond bloodbath.” That term may be pushing it, considering what a real bond bloodbath could look like.

But for holders of long-term bonds that they bought with negative yields, it is a very unpleasant experience when prices of those negative-yielding bonds also drop. And that’s what they’re facing now

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