Europe's Negative Yields Seep Into Non-Government Bond Sales

  • Berlin Hyp sells covered bonds priced to yield less zero
  • ECB may cut interest rates further below zero this week

The first non-government issuer just got paid to borrow in euros.

Berlin Hyp AG sold 500 million euros ($550 million) of three-year covered bonds priced to yield minus 0.162 percent on Tuesday, according to data compiled by Bloomberg. The sale followed the euro area’s first zero-coupon covered bond, sold last month by another German issuer, Landesbank Hessen-Thueringen Girozentrale.

European Central Bank easing has transformed the region’s bond market, pushing yields on about $2.5 trillion of sovereign securities to less than zero and forcing investors to accept negative yields on non-government debt. The central bank may open spigots even wider at a meeting this week, as about three-quarters of economists surveyed by Bloomberg expect an increase in bond-buying and all but one anticipate a further cut in already negative interest rates.

“With the ECB distortion set to continue on Thursday, with a further cut to the deposit rate, investors have few other options than to accept the new world order,” said Frank Will, the Dusseldorf, Germany-based head of covered-bond research at HSBC Holdings Plc.

ECB Purchases

Covered bonds, which generally enjoy high credit ratings, are debt securities backed by a pool of assets, such as mortgages and public-sector loans. The ECB has bought about 160 billion euros of the notes as part of quantitative easing.

In the secondary market, almost 70 percent of German covered bonds have yields of less than zero, according to HSBC data tracking issues of at least 500 million euros. Issuers have extended maturities in the last month to avoid selling bonds with negative yields, said Matthias Melms, an analyst at NordLB.

“There seems too little concern that the market has become more and more distorted or even impaired,” said Bernd Volk, head of European covered and agency bond research at Deutsche Bank AG.

Berlin Hyp is majority-owned by Germany’s savings banks, which are supported by the nation’s states and municipalities.

“The real discussion here is when will the first pure corporate be able to issue at a negative yield,” said Lutz Roehmeyer, director of fund management at Landesbank Berlin Investment GmbH, which oversees about 12 billion euros. “Sooner or later it will be the new norm.”

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