Sovereign borrowing costs have sunk deeper below zero in July, reaching a series of historic milestones as central banks signal another wave of monetary easing and forcing global investors to take on riskier debt for lower and lower returns.
Almost $13 trillion of global debt was yielding less than 0% in early July, a record. And for the first time, that now includes some higher-risk debt categories -- junk-rated corporate bonds and emerging market debt -- alongside top-rated sovereigns.
On Friday, a day after the European Central Bank indicated it was ready to unleash further stimulus, unrated French payments firm Worldline sold some of the most deeply negative-yielding debt on record. Investors will pay nearly 1% for the privilege of lending it 600 million euros, convertible into shares after seven years.
More such ground is likely to be broken as investors search out assets that provide at least a few basis points of yield.
“The negative-yield environment has completely changed the investor paradigm,” said Fahad Kamal, chief market strategist at Kleinwort Hambros.
“To see a real return you are going to have to go far out on the yield curve, take on risk to get a return, and that’s not ideal ... One of the great pillars of this market is TINA -- there is no alternative.”
Here are a few milestones charted by bond markets amid the great yield collapse of 2019:
TO ZERO AND BEYOND
In 2012, as the euro zone crisis raged, Germany’s six-month borrowing costs fell below 0% for the first time. Today, all its bonds with maturities out to 20 years carry sub-zero yields, with the 10-year bond having spent a record 80 days below 0%.
If the ECB resumes its bond-buying stimulus program, as many expect, it is likely the entire 750 billion euros of German government debt would trade at negative yields.
Dutch 10-year yields went negative this month for the first time since 2016, while its 15- and 20-year bonds turned sub-zero for the first time. Belgian and Austrian 10-year yields are in the same territory.
“Safe assets are not safe any more. When you buy a Bund at -0.35% yield, you are taking a decent risk of loss of capital in coming years and months,” said Charles Zerah, a portfolio manager at Carmignac.
LOWER THAN THE ECB
Germany’s 10-year yield fell under the ECB’s 0.40% main deposit rate in July -- the first time it had done so, although Bund yields did dip briefly under the refinancing rate, then the ECB’s main policy rate, in 2008.
British and U.S. 10-year yields have also fallen under the main policy rates of their respective countries.
SHAPE SHIFTER
Denmark has negative yields on all its government bonds -- described by one central bank official as a “milestone on a slightly sad background.”
The entire Swiss yield curve -- out to 50 years -- now trades with sub-zero yields, having briefly turned negative in 2016 amid deflation fears and uncertainty sparked by Britain’s shock vote to leave the European Union.
PERIPHERY PARTY
Absent yields in Germany and the Netherlands have herded investors into lower-rated southern European sovereign debt, sending Spanish, Portuguese and Greek bond yields to record lows. Italy has also joined the party.
Spanish and Portuguese 10-year yields are less than a third of their January levels, while 10-year yields in Greece, which defaulted nine years ago, fell below 2% for the first time in history.
Italy, despite a budget standoff with the European Union, pays less now for 10-year debt than since late 2016. July was the first time in a year that Italian government bonds contributed to the negative-yield portion of JPMorgan bond indexes.
CORPORATE RATE
Unthinkable once, investors are now paying to lend to some companies -- the share of investment grade (IG) corporate bonds with negative yields on Tradeweb is the highest since early 2017 and over half of JPMorgan’s euro IG corporate bond index had negative yields as of July 9. That took the tally of sub-zero euro IG corporate debt to 1.2 trillion euros.
More astonishing is the spillover of negative yields into “junk” bonds. As of July 9, JPMorgan’s high-yield euro corporate bond index had 10 bonds, worth 4.8 billion euros, yielding less than zero.
Irish firm Smurfit Kappa, rated BB+/Ba1, is among firms enjoying negative yields -- the rate on its 500 million euro 2021 bond tumbled this month to -0.096%, from 1.6% in January.
SUBMERGING IN EMERGING
Even emerging markets debt is following the trend.
Morgan Stanley estimates that some 74 billion euros worth of euro-denominated emerging market bonds -- 19% of outstanding euro issues -- are now negative-yielding. Central Europe comprises 65% of this.
Swiss franc-denominated issues from the likes of Poland also have negative yields.