Nestle’s corporate bonds traded at negative yields on Tuesday, highlighting investors’ desperate search for cash-conserving investments following the move by the European Central Bank to drive down borrowing costs across the continent.
The Switzerland-based chocolate-to-cereals food manufacturer is one of Europe’s most highly rated companies.
Demand for its bonds surged in the wake of the ECB announcement that it would begin quantitative easing through a €60bn a month asset purchase programme.
That sent yields, which move inversely to prices, on a Nestlé four-year, euro-denominated bond, which matures in 2016, to minus 0.008 per cent. That means investors are in effect paying to hold the bond.
Corporate bonds remain more attractive to some investors than highly-rated sovereigns, even though they are riskier, because they tend to pay more substantial interest.
But it is extremely rare for corporate bond yields to turn negative. Shell, the oil company, last week briefly saw one of its bonds trade negative before returning back into positive territory according to UBS.
Meanwhile, Germany’s benchmark borrowing rate dropped below Japan’s for the first time on record, a crossover regarded as symbolic of the deflationary trap into which some analysts fear the region has fallen.
Thibault Colle, a credit strategist at UBS, said that investors in top-rated corporate bonds were more concerned with protecting their cash than chasing yield given the economic worries plaguing Europe.
“We’re not in an economic cycle where you start to see growth coming through so investors focus on preserving their capital,” he said. “The ECB is in easing mode and that’s a great place for fixed income rather than equities because the growth story for earnings simply isn’t there.”
QE is seen as a boon for bond issuers, particularly companies and governments, whose borrowing costs have plummeted to all-time lows.
Record volumes of government debt have moved into negative yields since the ECB became the first central bank in the world to begin charging banks to hold their surplus cash last June. More than €1.5tn of euro area debt maturing in more than a year now pays a negative yield, according to JPMorgan, compared with nothing a year ago.
German debt now has negative yields on bonds with maturities up to six years, as does Denmark. The Netherlands, Sweden and Austria all have negative yields on debt up to five years while Swiss bonds are now negative up to 13 years.
Low yields have also encouraged governments to issue longer-term debt in order to lock in rates and Ireland has joined Portugal and Italy in selling 30-year bonds in a sale that drew orders of more than €11bn from global investors, allowing the country to borrow at just over 2 per cent a year.
“The ECB is the overwhelming driving force in markets,” said Philip Brown, head of sovereign debt markets at Citi. “The impact is being felt not only in the eurozone government bonds that the ECB plans to buy but in the assets that investors will move into once they sell to the ECB.”
Salman Ahmed, strategist at Lombard Odier Investment Managers said the ECB’s larger than expected QE programme could create severe dislocations in fixed income markets.
“Unlike the US and UK, the ECB’s programme will eat into the existing stock of debt securities held by banks and investors rather than just offsetting the new flow of securities,” he said. “It is highly conceivable in our view that highly rated European sovereign credit will remain in negative yielding territory for the foreseeable future.”
This article has been clarified since its original publication to include the maturity date of the Nestlé four-year bond.
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