Switzerland has become the first government in history to sell benchmark 10-year debt at a negative interest rate, as falling prices and unprecedented action by the world’s major central banks send global markets further into unknown terrain. The country’s central bank sold its bonds at -0.055%. Now when you compare that to the rest of the world and indeed Nigeria (our bond yields is about 14.512) it can get quite confusing. How in the world can someone borrow at a negative yield?
Selling a bond at negative yields essentially means you pay the Switzerland government to lend money to them. Madness right?? Well the idea is to discourage you from lending money to the government since the interest rate is negative. But in an economy where the financial market is after safer cash and will rather have the government keep their money rather than invest, then it does makes sense. It actually isn’t the first time this is happening as Financial Times explains
Bonds with negative yields have become one of the world’s fastest growing asset classes, accounting for around a quarter of Europe’s government debt market. In the last year Germany, Austria, Finland and Spain have all sold shorter-term debt at sub-zero yields.
But this is the first time that investors were effectively charged for lending money to a government for such a prolonged period. They bought SFr232.51m (€222.4m) of Swiss debt that will not be repaid until 2025 at a yield of -0.055 per cent — and the issue was comfortably oversubscribed.
Why is this happening?
Well, one major reason has to be all the money printing embarked upon by central banks around the world. Following the economic crisis of 2009 and the ensuing recession that followed, many western countries and their CBN decided to stimulate their economies by pumping money into the financial system (essentially printing). They did this by buying up bonds at near zero interest rates giving the financial markets excess cash to play around with. The hope was that it will stimulate the world economy as money will now be available to lend to small business, invest in capital expenditure which then leads to hiring of employees and then increase in salaries followed by increase in consumer spending and then increase in profits and then the cycle begins again. But like we all know, every good move come with unintended consequences. What wouldn’t we give to have negative yields in our FGN Bond which is currently at about 14%
Zero interest bonds or negative yield bonds are possible in Nigeria if corporate bonds were not junk.
In Nigeria, one is made to think that only FGN and state bonds are considered safe.