Negative Yields Infecting Credit Markets as Investors Capitulate

  • Investors are paying to hold 465 billion euros of bonds
  • Purchases driven ‘more because of capitulation:’ BlueBay

It’s getting harder for corporate debt investors to avoid the volume of negative yielding bonds that are now pouring into credit markets.

Investors are holding about 465 billion euros ($512 billion) of investment-grade company bonds with yields below zero, an eleven-fold increase on the start of the year, according to Bank of America Merrill Lynch data. While this means they’re effectively paying for the luxury of holding the debt, that’s still better than buying into the safest government bonds, where yields are even lower.

The dilemma facing investors is down to the European Central Bank’s asset-purchase stimulus program that’s pushed yields so low that buying some government bonds guarantees a loss. With the ECB setting deposit rates even deeper into negative territory, parking money there is a less viable alternative. Even though some short-dated indexes show corporate debt yields have dipped below or are approaching zero, the securities remain relatively attractive.

“Investors are going into these assets more because of capitulation,” said Geraud Charpin, a portfolio manager at BlueBay Asset Management LLP in London, which oversees about $58 billion. They’re buying “because cash is too expensive to hold in most European jurisdictions, rather than because they genuinely like the asset and are genuinely increasing their appetite for risk.”

The highest-rated euro-denominated senior and secured debt of non-bank companies maturing in one to three years yield an average minus 0.08 percent, the Bank of America data show. Euro debt with negative yields account for 24 percent of the investment-grade market and follow some 4.27 trillion euros of euro-zone government bonds that are carrying a negative yield, according to the data. 

The ECB accelerated the decline in yields when it started buying top-level corporate bonds in early June. It’s bought 10.4 billion euros of the securities, including negative yielding bonds of Siemens AG and Robert Bosch GmbH, which it can buy provided the yield is above the deposit facility rate at the time of purchase, according to Bloomberg data. Europe’s bond buyers have been left fighting for the crumbs.

“Investors are forced to chase a diminishing pool of assets,” said Richard Casey, senior credit portfolio manager at Pioneer Investments, with 221 billion euros of assets under management. “We have investors with excess cash, not a lot of primary supply, and there is a large buyer in the market pushing yields and spreads to levels they haven’t been at before.”

Secondary Market

While some bonds have been quoted with negative yields on the secondary market for months, Deutsche Bahn AG last week became the first non-financial company to sell sub-zero euro notes. The German railroad issued 350 million euros of five-year bonds to yield minus 0.006 percent, according to data compiled by Bloomberg. By comparison, German government bunds with a similar maturity yield minus 0.48 percent after reaching a record low of minus 0.64 percent last month.

For NN Investment Partners, that’s the differential that makes negative-yielding corporate bonds attractive, according to Sylvain de Ruijter, head of global fixed income at the company, which oversees about 190 billion euros and invests in negative-yielding bonds.

Resisting Trend

TwentyFour Asset Management and Pacific Investment Management Co. are resisting corporate notes with negative yields.

“You can understand paying a government to get your money back but paying a company to get your money back is a different prospect,” said Chris Bowie, a London-based money manager at TwentyFour, which has about 6.7 billion pounds ($8.8 billion) under management. The company prefers positive-yielding dollar and sterling debt.

Pimco is similarly bullish on American bonds, as well as emerging-market securities, and forecasts U.S. investment-grade and high-yield notes will return 3 percent to 6 percent over the next 12 months.

Companies may be able to issue euro bonds at negative yields “but we would avoid those,” Mark Kiesel, chief investment officer for global credit, said. “The demand is coming most likely from investors in Europe where the alternatives are even more negative yielding government bonds.”

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