Corporate Bond Yields Hit Record Low in Europe After Brexit Voteby
Average yields on investment-grade euro notes drop to 0.9285%
Low borrowing costs draw companies after issuance freeze
European companies have a lot to thank Mario Draghi for.
It’s never been so cheap to borrow in euros, even after markets were whipsawed by Britain’s decision to exit the European Union. The average yield on investment-grade corporate bonds in euros dropped to 0.9285 percent on Wednesday, the lowest in Bank of America Merrill Lynch index data going back to 1998.
The European Central Bank president’s efforts to stimulate growth in the region by buying highly rated corporate bonds has made the securities a refuge for investors. Low borrowing costs are starting to lure companies back to the bond market after six days of zero issuance surrounding the referendum.
“Draghi is a key driver of this,” said Fraser Lundie, co-head of credit at Hermes Investment Management in London, which oversees 24.1 billion pounds ($32.5 billion) of assets. “There’s a significant buyer snapping up a large amount of bonds in this market. It’s being seen as a safe haven.”
Even as investors flock to corporate bonds, low rates are proving a challenge. Insurers and pension funds need yields of at least 1 percent to provide the level of return they guarantee to policy holders, according to David Riley, who helps oversee $58 billion of assets as head of credit strategy at BlueBay Asset Management LLP in London.
“It’s not the level of yield credit investors are accustomed to, even with spreads at fair value,” Riley said. “Investors are wondering if they want to take on credit risk at this level. It’s pushing investors to seek yield in the U.S. and even emerging-market debt.”
Bond buyers are having to scour the world for decent returns. The yield on German 10-year government bonds dropped to a record of minus 0.17 percent the day after the U.K. referendum as investors rushed for safety.
About 3.8 trillion euros of investment-grade bonds have yields below zero, up from 3.1 trillion euros the day of the vote, and more than double the 1.8 trillion euros of debt carrying negative rates six months ago, according to Bank of America Merrill Lynch’s Euro Broad Market Index, which includes sovereign borrowers. The phenomenon means investors will receive less for a bond than they paid for it.
The average premium investors demand to hold investment-grade corporate bonds rather than government debt fell to 136 basis points on Wednesday from 140 basis points the day before, the data show.
“Depending on what happens in the government bond market, we could, in theory, see the average yield on corporate bonds go negative,” said Lundie at Hermes.
Still, the ECB’s policy is benefiting borrowers. Brown-Forman Corp., the maker of Jack Daniel’s whiskey, and German railway operator Deutsche Bahn AG marketed bonds in euros on Thursday, a day after beermaker Molson Coors Brewing Co. ended a freeze in corporate issuance with a sale of 800 million euros of notes.
The ECB has stepped up corporate-bond purchases to more than 500 million euros ($556 million) a day from 348 million euros on the first day of buying on June 8. The central bank said it had bought 4.9 billion euros of corporate notes as of Friday.
Its buying has included securities from troubled German carmaker Volkswagen AG, Siemens AG, Europe’s biggest engineering company and Anheuser-Busch InBev NV, the world’s largest brewer. The ECB has cast its net as wide as the program allows by buying notes from the mostly junk-rated Telecom Italia SpA.
“I’d like to see more risk premium to compensate for the political uncertainty Europe’s facing at the moment with Brexit and the potential negative implications for European growth,” said Paul Shuttleworth, a London-based portfolio manager at Western Asset Management Co. which oversees about $450 billion of assets. “But whether that will happen or not, given the power of the ECB, is unclear. Many borrowers are benefiting from these low yields.”