Markets

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

Mario Draghi is creating a monster credit bubble, and he doesn't seem to care. In fact, that seems to be his goal.

About three months ago, the Draghi-led European Central Bank started buying corporate bonds in the region for the first time. The results have been dramatic and, at times, alarming.

Yields plunged. Corporate-bond sales ballooned. Values became utterly distorted.

Investors are now literally paying European companies to borrow. Sanofi, a French drugmaker, just became the first nonfinancial private company to issue debt that yields less than zero, according to Bloomberg News. Henkel, a German household products maker, quickly followed suit.

Going, Going, Gone
Bonds of some investment-grade European companies now carry negative yields
Source: Bloomberg

This seems pretty crazy, but buyers of this debt can convince themselves they aren't getting ripped off by at least regarding the borrowers as safe companies that will repay most of the money they borrow.

Less clear is how investors are justifying purchases of junk-rated bonds that promise nothing and come with big risks. Because of the ECB's bond-buying bonanza, shorter-term notes of some junk-rated companies, including Peugeot and HeidelbergCement, are yielding about zero percent and heading lower. Negative-yielding junk bonds will soon be a reality, Bank of America analysts wrote in a report on Monday.

Into Oblivion
Peugeot's short-term bond yields have fallen close to zero on the heels of the ECB's stimulus
Source: Bloomberg

Does this mean risky debt in Europe getting less risky? No. Fundamentals are, in fact, deteriorating, according to the Bank of America strategists, with investors recovering less from defaulted debt than they have in the past.

European central bankers don't seem too worried about these distortions. In fact, they seem eager to see those animal spirits return to generate growth. The ECB is considering expanding its program, possibly to new asset classes. 

The ECB may end up getting too much of what it wants. The Bank of America strategists warn against a rapid rise in leverage, which could lead to downgrades, thus making some debt ineligible for the central-bank purchase program.

In the meantime, European central bankers seem to have created an Alice-in-Wonderland credit market that's infecting the rest of the world. It's sending investors into emerging markets and the U.S., where corporate-bond yields are about the highest ever relative to similarly rated European debt.

Breaking Away
European corporate bonds are nearly yielding the least ever relative to similarly rated U.S. notes
Source: The BofA Merrill Lynch BB Euro High Yield Index, The BofA Merrill Lynch BB US High Yield Index

That's especially remarkable because U.S. corporate-bond yields are close to all-time lows themselves.

This dynamic is forcing investors worldwide to come up with new frameworks of logic that hinge entirely on the continuation of the ECB's stimulus effort. In any other world, negative-yielding junk bonds wouldn't exist. The longer this goes on, the harder it'll be for the ECB to extricate itself from this fool's paradise.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net