Frederick the Great at the battle of Zorndorf

Behold! The First Covered Bond to Be Sold With a Negative Yield

A milestone for markets.

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.

Source: Bloomberg