Investors have become used to seeing bonds trade at negative yields but last week YieldReport saw something that had long-time market watchers scratching their heads.
Two European companies, French pharmaceutical company Sanofi and German consumer goods company Henkel, issued corporate bonds at negative yields. It is believed to be the first time that non-bank corporates have issued negative yielding bonds. Sanofi sold €1 billion of 3 ½ year bonds with a yield-to-maturity of -0.05% while Henkel sold €500 million of 2 year bonds at the same yield.
The market is, in effect, paying money for the companies to borrow the money. It is somewhat mind-numbing to think that investors in Europe are now so worried about the security of their capital or deflation destroying the value of their capital that they see these bonds as a better investment than the alternatives.
Perhaps the more realistic assessment is that traders are simply betting that the European Central Bank will line up to purchase the bonds from traders at an even lower negative yield. The ECB, in its push to provide liquidity for banks to lend money via quantitative easing (or bond buying programme), is purchasing €80 billion worth of bonds per month. In other words, the traders may be looking to generate a capital gain on their bonds by front-running the ECB. As YieldReport has previously noted, markets have become so distorted that investors are buying bonds for capital gains and equities for income.
With the ECB charging banks 0.40% to deposit funds, the commercial banks see better value in investing in almost anything with a higher yield and, in this case, it is corporate bonds. The ECB is buying €80 billion of bonds every months and is rumoured to running out of bonds to buy.
It is estimated that there are around $US13.5 trillion-plus of bonds around the world that are at negative yields with around 1/3 of these in Europe.