Bonds with negative yields sound like be awful investments. So why are investors piling into bond ETFs?
Nicholas Colas, Co-founder of DataTrek Research, mused on that question in a research note out Thursday.
“The short answer is that negative yielding bonds still pay a coupon,” Colas wrote. “The negative yield comes from principal erosion over time. Plunk down $120 for a bond that pays $1 annually and redeems at $100, and you’re out $10. That’s the negative yield, not a bill sent to every bondholder.”
For two of the biggest international bond funds – that is, those that exclude investments in the U.S, Colas says he calculates their yields currently to be about 1%, while year-to-date price returns have been about 5-6%.
“Bottom line: negative yielding bonds do not create negative yielding ETFs and mutual funds,” Colas wrote. “Very low yields… Clearly. Principle risk… Yes, that much is actually guaranteed. But the exercise here is a useful reminder of why investors still buy “negative yielding” bonds.”
Meanwhile, bond funds have benefited from the market’s “risk-off” attitude this year. So far in 2019, fixed-income funds have had $83 billion of inflows, compared to about $34 billion for stocks. More specialized asset classes are also seeing inflows: $4 billion each for commodity/precious metal funds and real estate funds, and about $3 billion for “volatility-linked products.”