China Manages To Keep Investors Interested

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You may have noticed banks are offering fairly anemic interest rates on savings as of late.

But at least they aren’t negative.

For the first time in China’s history, its government has sold debt at an effective negative interest rate.

In plain English – investors are paying China to take their money.

What’s Happening?

The Chinese government sold $4.7 billion of euro-denominated bonds primarily to institutional investors from Europe, the Middle East, and Africa.

The 5-year bonds were priced with a yield of negative 0.152%, while the 10 and 15-year bonds offered positive yields of 0.318% and 0.664%, respectively.

Why Would Anyone? As is the case with much of finance, returns are all relative:

  • For starters, there aren’t currently many safe places to generate yield. According to the ICE BofA Global Broad Market Index, there is over $16.9 trillion of global debt outstanding that is trading at negative yields.
    For comparison, 5-year German Bunds (seen as a safe haven) offer a yield of negative 0.74%.
  • Investors are also eager to get more exposure to the People’s Republic. China’s economy notched 4.9% year-over-year growth in the third quarter, and the IMF expects China to be the only major economy to grow in 2020.

But Still, Why Not Under The Mattress? Analysts said much of the demand came from investors who are required to own Chinese bonds to satisfy their index requirements. Also, investors expecting deflation might be willing to tolerate a negative yielding bond. Others just like feeling pain.

All told, the offering generated more than $20 billion of demand.

The Takeaway:

The issuance from China comes just weeks after Beijing sold $6 billion of dollar-denominated debt directly to U.S. buyers for the first time in decades, drawing record demand.