woensdag 25 juli 2012

How low can negative yields on Swiss bonds go?

We have been seeing negative bond yields in Switzerland and Germany. Which is very odd if you ask me. The question begs to be asked: "How low can negative yields go?".

To give an answer to this you need to have an understanding of the price-yield curve of bonds. You can gain money if yields go lower (bond price rises), but you will lose money because you need to pay interest on the negative yield. So there should be an equilibrium point and as a scientist I very much want to find that equilibrium point.

There is a very nice online tool for the price-yield curve on this site: Wolfram: Price-Yield Bond Curve.

Inputs for this tool are:
1) Years to maturity (if you buy a new 2 year bond it has 2 years to maturity)
2) Annual Coupon payment (the amount of cash you get per annum)
3) Yield (the annual percentage cash you get on the principal)

I will analyze the 2 year Swiss government bonds in this article.

Chart 1: Swiss 2 year Government Bonds

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