What would Frederick the Great think?
Some 250 years ago the Prussian King, seeking to boost his empire's flow of credit in the aftermath of the Seven Years' War, invented a system of credit that would develop into a bulwark of contemporary European capital markets: the covered bond. Back then, lenders got a claim over Prussian assets in exchange for their money, along with some return. Two and a half centuries later, they're getting only one of those things.
Tuesday saw the first sale of a benchmark negative-yielding covered bond, according to Bloomberg data, with German mortgage bank Berlin Hyp AG selling a €500 million ($550 million) deal at a yield of minus 0.162 percent.
That's just the latest addition to the world's $7 trillion-strong pile of negative-yielding debt. It wasn't unexpected, given that the market has already seen a covered bond sold with a negative coupon, and many previously issued covered bonds are also trading below zero percent.
"The primary covered bond market is set for a new milestone, as Berlin Hyp (BHH) is likely to issue a new three-year €500 million mortgage Pfandbrief at a negative yield today," wrote Joost Beaumont, a strategist at ABN Amro, before Tuesday's sale. "Most comparable three-year German Pfandbriefe are trading in negative territory and BHH [would have] to issue its three-year benchmark at an unrealistic spread in order to offer investors a positive yield."
It is also yet another milestone on the long negative-yield road towards the unknown. And one that is unlikely to be welcomed by investors who are forced to put their cash into securities yielding a big fat zero or less.
Still at -0.162 percent, Berlin Hyp's new covered bond yields more than equivalent three-year German government debt—a fact which may go some way towards explaining its appeal in a modern world awash with modern negative yields.