Negative Yielding Corporate Bonds Go Extinct

(Bloomberg) — Negative yields have vanished from the world’s corporate bond market as investors brace for monetary tightening.

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Every single note in a Bloomberg index tracking the global investment-grade corporate bond market yielded 0% or more at Friday’s close, calculated using the mid point between bid and ask prices. It’s a dramatic turnaround from August, when more than $1.5 trillion of debt, most of it in Europe, came with a sub-zero yield.

It marks the end of an era fueled by easy money and extraordinary central-bank policy meant to hold down borrowing costs and stimulate inflation. That was sparked by a combination of the financial crisis and the European debt crisis, followed by the outbreak of the pandemic. Now it’s all going in reverse. Bond yields are soaring around the world and investors are worried that inflation is getting out of control.

The Bloomberg global corporate bond index is now yielding about 3.7%, its highest since March 2020, jumping from 1.3% at the end of 2020. Bonds of Credit Agricole SA, Nestle Finance International Ltd. and Switzerland’s SGS SA were among the last to yield below zero, according to data compiled by Bloomberg.

“This development makes the global credit market more attractive now,” said Christian Hantel, a senior portfolio manager at Vontobel Asset Management AG, which oversees fixed income worth 52.1 billion Swiss francs ($54.5 billion). “We always maneuvered around these negative-yielding securities as they do not add value.”

Rate Prospects

Federal Reserve Chair Jerome Powell outlined his most aggressive approach to taming inflation to date last week, potentially endorsing two or more half percentage-point interest-rate increases while describing the labor market as overheated. Meanwhile traders are betting the European Central Bank will raise rates above zero this year for the first time since 2012, after a string of hawkish comments from policy makers spurred speculation the bank is priming the market for faster-than-expected monetary tightening. The ECB’s deposit rate is currently at a record low of minus 0.5%.

Negative yields have been a mind-bending phenomenon for even the most experienced fund managers. On one level, the return of positive yields is good news for anyone that’s buying a bond and plans to hold it to maturity.

Sub-zero yields briefly disappeared at the start of the pandemic only to reappear days later as central banks pulled out all the stops to keep economies afloat. Most strategists say positive yields will remain as long as the European Central Bank holds onto its hawkish stance.

“For negative yields to return to euro investment-grade, a hiking cycle has to be priced out or reversed,” said Song Jin Lee, a credit strategist at HSBC. “In that scenario, we are talking about a material growth slowdown, maybe even a Eurozone recession.”

Yield Outlook

Marco Stoeckle, head of corporate credit research at Commerzbank AG, said yields in Europe will likely creep higher “in a back-and-forth fashion rather than a straight line.”

“Yields below 2% are still rather low if you look back beyond the last decade, and real yields still are — and likely also will remain — negative.”

Government bond yields were falling on Monday while equities slumped as the spread of the coronavirus in China worsened and the likelihood of aggressive central bank tightening raised the prospect of a slowdown in global growth.

Still, positive yields are making high-grade bonds attractive in their own right, instead of the least-bad option in a world where losses on government bond or cash holdings are even worse.

“Ultimately it could draw investors back to higher-quality segments where yields now look compelling,” said Alex Eventon, head of investment-grade credit at Edmond de Rothschild Asset Management, which oversees 8.5 billion euros ($9.1 billion) of fixed-income assets.

Elsewhere in credit markets:

EMEA

A pound note sale from Rentenbank is the only offering in Europe’s primary market so far on Monday. An expected inflation-linked gilt sale from the U.K. government could spark a revival of sales from sovereigns, supranationals and agencies, according to a survey conducted by Bloomberg News on April 22.

• Jigsaw Funding, a U.K. housing association, is planning to sell a sustainability bond, while the States of Jersey has mandated banks on an expected 30-year sterling bond

• 59% of respondents expect sales to fall below 20 billion euros compared with 69% in last week’s survey; issuance last week totaled 13.8 billion euros after a muted week in Europe’s primary market

• Bonds of Adler Group SA tumbled to record low levels as investors continued to assess KPMG’s forensic audit of the embattled German landlord last week

Asia

Investors in Asian dollar debt have lost $155 billion over the past 9 months, pummeled by weakness in China in addition to the global selloff in fixed income seen around the world as interest rates rise.

• The primary market for dollar bonds in Asia was subdued Monday as investors assess prospects for faster-than-anticipated U.S. rate hikes

• China has signaled a willingness to allow local governments to increase off-balance sheet debt again after a crackdown in recent years to bring it under control

• China’s central bank stepped up its support for several distressed developers by allowing banks and bad-debt managers to loosen restrictions on some loans

• About 13% of rated Japanese companies face more credit risks if the war in Ukraine escalates, with auto-sector firms especially vulnerable, according to Moody’s Investors Service

Americas

After a $55 billion borrowing blitz led by the biggest U.S. banks, the focus shifts to bellwether investment-grade borrowers reporting earnings this week.

• Preliminary estimates from high-grade syndicate desks project around $25 billion in supply as corporate heavyweights in everything from technology and industrials to health care and consumer goods report earnings — and become potential borrowers

• The investment-grade CDX, a key measure of corporate credit risk, climbed higher Friday as markets and Treasury yields reacted to more hawkish tones from both the Federal Reserve and the European Central Bank

• U.S. junk bond investors saddled with losses so far this year can take heart from new Wall Street estimates for a big decline in U.S. offerings

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