As a result of the rush to global NIRP, which now sees central banks and their sovereigns accounting for over 25% of global GDP, amounting to around $6 trillion in government bonds, trading with negative yields, a question has emerged: when will corporate bonds follow this govvie juggernaut and how soon until investors pay not government but companies to borrow?
That is the focal piece in today's note by our favorite DB credit strategist Jim Reid who muses as follows:
There is starting to be chatter as to what the incentive is to buy Euro corporate bonds at a negative yield if it ever happens. It may well be tested very soon as one consequence of the recent ECB/BoJ hint/action has been the strong rally in global fixed income.
A scatter of the European non-financial corporate yield universe (in today’s pdf) shows we have so far resisted such a move (bar 3 bonds with a bid yield a basis point or two sub-zero). There is a perception that investors won’t buy corporates with a negative yield and therefore a deeper rally in Government bonds would be a spread widener. Whilst this makes some sense the evidence of spread behavior as yields have gone lower and lower doesn’t necessarily support this. 1-3yr and 3-5yr Euro AA spreads have been range bound in the last 6 months - a period that 2 and 4 year Bund yields have rallied around 30bp and 40bps respectively and deep into negative territory. So one might have expected some widening if the zero bound was a hard floor for corporates.
Our central view is that zero might be a temporary resistance point if Government yields rally further but that at some point the dam will break and corporates will trade on a spread basis and go sub-zero.
Obviously this all depends on whether a further deeper rally occurs. At the moment 2 year bunds are at -0.47% and 1-3yr AA spreads at +58bps so we’re getting closer to testing the theory, especially for the tighter bonds in the index.
Is Jim Reid right, and will NIRP soon result in paradoxical outcome of companies paying down debt by issuing debt? The answer is a resounding yes, especially if the ECB cuts its deposit rate lower to -0.4% as the market now largely expects, which in turn forces Japan to cut to -0.2%, forces China to devalue more, and so on, as the next deflationary wave is unleashed in the global race to debase.