February 4th, 2015 9:36 pm
Earlier today I posted this piece on negative yields on corporate bonds. The article detailed the story of a four year bond issued by Nestle which traded with a yield slightly negative. The WSJ now has a story about negative yields on sovereign debt (which at least conceptually makes some sense) and opens with the story of Finland’s recent sale of 4 year notes which yield less than zero. In Switzerland one must saunter out the yield curve to the 13 year point to escape negative rates.
Via the WSJ:
Markets
Negative Yields on Eurozone Sovereign Bonds Becoming New Normal
Finland First Nation in Region to Pay Negative Yield on Five-Year Debt Sold at Auction
By
Josie Cox and
Emese Bartha
Updated Feb. 4, 2015 11:52 a.m. ET
2 COMMENTS
As the full force of the European Central Bank’s blockbuster asset-purchase program continues to bear down on debt markets, negative yields on sovereign bonds in the region look set to become the new normal.
On Wednesday, Finland became the first nation in the region to pay a negative yield on five-year debt sold at auction, suggesting that investors are unperturbed by the country’s weak economic expansion and its dependence on troubled Eastern Europe.
Finland’s exposure to Russia, both geographically and as an export partner, makes its government debt riskier than that of other countries, but this in turn demonstrates just how fierce the demand for eurozone government debt has become.
“The negative yields could become even more negative, hence price gains are still possible,” said Rüdiger Kerth, Frankfurt-based portfolio manager for European government bonds at Union Investment, which looks after around €220 billion in assets.
Jürgen Odenius, chief economist at Prudential Fixed Income in New York, with around $500 billion in assets under management, said that he’s not deterred by negative yields either.
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“The bonds still allow you to store money in a safe way and the market is also incredibly liquid allowing you to get in and out very quickly if necessary,” he said. He added that he also expected yields to fall further as the ECB puts its words into action.
German government bonds offer negative yields on maturities up to six years, according to Tradeweb, as do bonds issued by Denmark. Five-year government debt carries a negative yield in the Netherlands, Austria, Sweden and Finland, and four-year government debt in France and Belgium.
In Switzerland, bonds with a maturity of up to a staggering 13 years offer less than zero in terms of yield, and with the U.S. Federal Reserve broadly expected to raise interest rates later this year—exacerbating monetary policy divergence between the two continents—the trend is tipped to continue.
But Finland’s venture into negative territory nonetheless marks a significant juncture.
Following two consecutive quarters of mild economic expansion, Finland’s gross domestic product is expected to have contracted in the fourth quarter.
Sanctions on Russia by the West and the subsequent counteractions have been a major drag on the Finnish economy, with exports to Russia posting a 13% annual decline.
“In this situation it is clear that liquidity is dominating fundamentals,” said Richard McGuire, a fixed-income strategist at Rabobank in London. “The market is simply focused on the wall of liquidity that is coming its way and what effect that will have on the whole market.”
Finland’s 10-year benchmark government bond was trading around 0.38% Wednesday, down from almost 0.53% at the start of 2015.
Alberto Gallo, head of macro credit research at Royal Bank of Scotland Group PLC in London, said that there are now around €2.5 trillion ($2.8 trillion) of sovereign bonds trading with a yield of below 0.1%, equating to 34.8% of the total market. J.P. Morgan earlier this month calculated there are currently €220 billion of bank reserves subject to negative interest rates, and that this figure will increase exponentially because of the ECB’s forthcoming colossal bond-buying program.
Debt due to be sold at auction by the Netherlands, Sweden, Switzerland, Germany and even the Czech Republic over the coming weeks, could price with a negative yield too.
Following a hotly anticipated monetary policy meeting in Frankfurt last month, ECB President Mario Draghi said that the bank intends to start flooding the eurozone with more than €1 trillion in newly created money, sparking a rally in stock and bond markets and sending the euro plunging.
Germany’s DAX stock index—which has risen more than 10% so far in 2015—hit yet another all-time high Wednesday, which analysts largely attributed to the anticipation of quantitative easing, or QE.
The yield on the country’s 10-year debt dipped well below 0.3%, undercutting the yield on Japanese 10-year debt and marking a euro-era low.
Alessandro Tentori, head of rates strategy at Citigroup, said that the “the stigma of negative interest rates” had now completely disappeared.
The yield on a four-year euro bond issued by Kitkat-maker Nestlé SA turned negative on Tuesday, making it one of the few companies ever to see the yield on its debt with a maturity of longer than two years fall below zero.
Consumer goods company Unilever PLC last week sold €750 million of seven-year debt offering a yield of just 0.653% at pricing.
“Even though the ECB won’t purchase private corporation debt, aside from covered bonds, the effect of the anticipation of QE is having profound consequences,” said Mark Harmer, a fixed-income strategist at Dutch Bank ING in Amsterdam.
Commenting on Nestlé’s yields turning negative, Jim Reid, global head of fundamental credit strategy at Deutsche Bank, said that, considering the “absurdly low yields” on sovereign debt, “it was perhaps only a matter of time before we saw corporate euro-denominated yields follow suit.”
“Maybe chocolate is the new gold.”
–Christopher Whittall contributed to this article
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