7th September 2016

Negative yielding corporate bonds are here… to stay

FTSE 100
6,826, -53
10, 687, +15
S&P 500
2,186 +6.5
iTraxx Main
65.5bp, -1bp
iTraxx X-Over Index
307.5bp, -1.5bp
10 Yr Bund
-0.11%, -6bp
iBoxx Corp IG
B+119bp, unchanged 
iBoxx Corp HY Index
B+415bp, +2bp
10 Yr US T-Bond
1.54%, -6.5bp

Capital preservation. Forget about clipping the coupon…

For once there was little to get excited about in equities or (initially) in government bond markets, with the focus squarely being on a dramatic day in the corporate bond sector. A slew of issuance from the likes of Glencore, Henkel and Sanofi had investors cock-a-hoop and hoping to get some of the action as they put their orders in. That mad scramble for primary market corporate risk is an issuers’ dream, as they go out with enticing initial price talk and then ratchet the pricing tighter – but there was twist in yesterday’s deals. The shorter-dated ones in yesterday’s session offered negative yields to investors for the privilege of funding them. So we had the first and second ever negative yielding bond – at new issue – from a “pure” corporate, as Henkel printed a 2-year deal offering with a yield of -0.05%. That is certainly not anything to get excited about – as an investor.


Oversubscribed, despite negative yield: Sanofi

Still, Sanofi followed with a 3.5-year maturity transaction as part of a multi-tranche offering with the same negative yield, which again was oversubscribed. Furthermore, the 6-year offering from the group carried (not) a 0% coupon – the longest corporate deal to date to do so. Henkel’s 5-year didn’t hold the record for even a few minutes (& also came with a 0% coupon) – as it was priced very late in the day. As if to ram home the declining coupon income from corporate bonds, even Sanofi’s 10-year only carried a 0.5% coupon. The ECB’s heavy hand is at work here, but we have never believed that cheap funding would necessarily find its way into the economy as prescribed and envisaged from the manipulation of the corporate bond market through QE. All credit to the central banks – as they try something new – but it isn’t working.

The deals were 2-5x oversubscribed and investors were not shy in coming forward to park their cash – or otherwise, in negative yielding corporate bonds. After all, custodian banks are charging them more….much more, as it happens. With yields so low, the only sector of the market that wants cash is the corporate sector, but they’re hoarding it, much to Draghi’s chagrin!

Henkel took €1.2bn in a two-tranche offer, Sanofi took €3bn in a 3-trancher while Glencore was alone in giving the juice away in a €1bn deal at midswaps+195bp. RCI Banque added €750m to the day’s non-financial corporate total. €6bn for the session was a very good day’s work and the pipeline is still stuffed full of deals to come. Commerzbank was the sole borrower in senior financials issuing €1bn in 7-year funding.

So the ECB is getting what it wants and the BoE must be looking on thinking that they’re going to get the same too, eventually. So for good measure and as well as those deals above, Henkel also issued in dollars ($750m) and added a sterling tranche (£300m, 6-year with a 0.875% coupon). The big picture, though, is one of crunching yields again (see macro comment below, for example), and the confidence these deals breeds will only see bravado from other borrowers wanting to pay nothing (or less!) leaving bankers needing to work hard to get their fees. Although judging by the day’s efforts they likely won’t need too much convincing as investors are resigned to buying an asset yielding more than cash.

Macro disappoints

The big macro number for the day ought to have been the Eurozone’s GDP release which showed that the QoQ rate was a sluggish 0.3%. But it was later trumped by the US service sector ISM print which came in at a sharply lower than expected 51.4, suggesting that the sector is growing at a much slower rate than envisaged. We got some excitement from it. It was not quite one of those “not on your nelly” moments as far as that US rate hike is concerned, but it adds to the chorus of generally weaker-than-expected macro data that must have the Fed wait a little longer.

That was certainly the way the FX and bond markets took it as the dollar fell (now north of $1.34 versus sterling) and the 10-year Treasury yield dropped 6.5bp to 1.54%. It didn’t end there! The 10-year Bund yield fell to -0.11% (-5.5bp), the equivalent Gilt yield to 0.66% (-6bp) and Spanish yields were almost back in record low territory at 0.92% (-8bp) – and they don’t even have a government. Next up was Italy, BTPs in 10-years yielding 1.08% (-7bp in the session) and also not far off the record lows (around 1.02%). Who said the world was a better place of late?

This sort of weaker data, which now seems to pop up more often than not, is only going to sustain the lure of corporate debt. We have continually suggested that government bond yields are going lower, that macro will continually disappoint and the Eurozone is a busted flush. More accommodative policy is coming in due course (end Q4/Q1 2017) from the ECB and into it, corporate bond yields are going to fall more. The default rate stays low (less than 2%) while such easy money is available – debt service stays relatively supported.

Corporate bond performance has legs in it yet.

Lower in yield means higher returns

For credit, the market direction is now well-established. Sort of.

Spreads were unchanged in the session in IG, but yields for the index (Markit iBoxx) fell to a new record low of 0.80%. That’s all down to the rally in government bonds, which is understandable given that the focus for the investor was on primary and their best efforts (inflated orders) to try and get their fill of bonds. IG corporate bond are up at 6.2% YTD. Sterling corporates were a touch better bid, but the session passed away without too much excitement. It was the same story in HY with spreads a tad wider at B+415bp from an index perspective, but yields lower – and returns higher.

That’s it. You get the drift – lower in yield, tighter in spread – albeit in laboured fashion for the former and in slightly more volatile fashion for the latter. Have a good day, back again tomorrow.

Suki Mann

A 30+ year veteran of the European corporate bond markets and in his role as Credit Strategist, Dr Mann has been ranked number one in the Euromoney Investor Survey eight times in ten years. Previously with Societe Generale and UBS, he now shares views of events in the corporate bond market exclusively here on CreditMarketDaily.com.