Corporate bonds join the negative yield club

More than $36 billion in corporate bonds with a short-term maturity are currently trading with a sub-zero yield as the European Central Bank begins buying debt next week.

In the wake of the ECB announcing this policy shift in March, euro zone corporate bond yields have fallen as debt sales from companies have accelerated.

The yield on a host of short- term paper sold by groups including Johnson & Johnson, General Electric, LVMH Moët Hennessy, Louis Vuitton and Philip Morris now trade below zero in the secondary market.

No corporate bond has yet been sold with a negative yield, but recent debt offerings from French pharmaceuticals maker Sanofi and consumer goods conglomerate Unilever were issued as zero coupon securities.

In a world where $10 trillion of debt – mostly Japanese and European sovereign bonds – trades with a negative yield, corporate bonds have begun joining the club, according to data from Barclays.

Separate data tracked by Markit, which put the total figure many multiples higher, shows much of the debt issued in euros, yen and francs.

“As bonds get to a shorter and shorter maturity, you’ll see more trade with a negative yield,” said Iain Stealey, a portfolio manager with JPMorgan Asset Management. “Everything is relative, and zero is not the lower bond any more.”

Already positioned

Negative yields have not deterred investors from purchasing the bonds as they brace for added buying pressure from the ECB, seen pushing prices even higher. Some have already positioned for the buying that officially starts on June 8th.

“As a dealer, you are happy to bid through zero because you know the ECB will keep buying,” said Barnaby Martin, head of European credit strategy at Bank of America Merrill Lynch.

The ECB has said it is permissible for it to purchase investment-grade corporate bonds so long as they yield more than the ECB’s deposit rate of -0.4 per cent.

The lurch lower in corporate yields was presaged by the decline in government borrowing costs, which began in notes maturing within one year before spreading further out the yield curve. Many fund managers, insurers and pension funds that typically invested in sovereign bonds have since drifted into the higher yielding world of corporate bonds.

The gap between what European companies and governments pay to issue debt, known as the spread, has narrowed. The average yield on a European corporate bond maturing within the next three years has dropped, touching a record low of 0.38 per cent on Wednesday, according to Barclays.

“If you have additional buyers coming into the market, which is what the ECB is doing for this paper, then many investors would see the potential for tightening on corporate spreads,” said Dan Botoff, the head of RBC’s fixed income syndicate in the US.

– (Copyright The Financial Times Limited 2016)