Corporate bonds

Negative corporate bond yields have disappeared

Negative yields have disappeared from the global corporate bond market as investors brace for monetary tightening.

Every rating in a Bloomberg index that tracks the global investment-grade corporate bond market returned 0% or more as of Friday’s close, calculated using the midpoint between bid and ask prices. It’s a dramatic turnaround from August, when more than $1.5 trillion in debt, most of it in Europe, had a yield below zero.

This milestone marks the end of an era fueled by easy money and extraordinary central bank policy designed to contain borrowing costs and spur inflation. This was triggered by a combination of the financial crisis and the European debt crisis, followed by the outbreak of the pandemic. Now everything is upside down. Bond yields are soaring around the world and investors fear inflation is spiraling out of control.

The Bloomberg Global Corporate Bond Index is now yielding around 3.7%, its highest level since March 2020, rising from 1.3% at the end of 2020. Bonds from Crédit Agricole SA, Nestlé Finance International Ltd. and Swiss company SGS SA were among the last to perform below zero, according to data compiled by Bloomberg.

“This development makes the global credit market more attractive now,” said Christian Hantel, senior portfolio manager at Vontobel Asset Management AG, which oversees fixed income securities worth 52.1 billion Swiss francs (54 .5 billion dollars). “We’ve always maneuvered around these negative yielding stocks because they don’t add value.”

The cost of high-quality US funds has nearly doubled this year as government bonds plummet. The worst-case yield on the high-quality Bloomberg benchmark index closed at 4.25% on Friday, not far from the post-global financial crisis peak reached in March 2020.

Cheaper bonds could entice buyers, said Vishal Khandouja co-head of U.S. multi-sector and diversified fixed income at Morgan Stanley Investment Management.

“It becomes an attractive first entry point,” Khanduja said in an interview on Monday. “I’m sure the volatility is going to be a lot more going forward, so I think you would have a few more entry points.”

Prospect rate

Federal Reserve Chairman Jerome Powell outlined his most aggressive approach to tackling inflation yet last week, potentially approving two interest rate hikes of half a point or more while outlining the labor market as overheated. Meanwhile, traders are betting the European Central Bank (ECB) will hike rates above zero this year for the first time since 2012, after a series of hawkish comments from policymakers spurred speculation that the bank is preparing the market for faster-than-expected monetary tightening. The ECB deposit rate is currently at an all-time high of minus 0.5%.

Negative returns have been a mind-blowing phenomenon, even for the most experienced fund managers. On one level, the return of positive yields is good news for anyone buying a bond and planning 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 returns will remain as long as the ECB maintains its hawkish stance.

“For negative yields to return to euro investment grade, an upside cycle must be eliminated or reversed,” said Song Jin Lee, credit strategist at HSBC. “In this scenario, we are talking about a significant slowdown in growth, possibly even a eurozone recession.”

Return outlook

Marco Stoeckle, head of corporate credit research at Commerzbank AG, said yields in Europe would likely rise “in a back-and-forth rather than a straight line. …Returns below 2% are still quite low if you look beyond the past decade, and real returns are still – and likely will also remain – negative.

Government bond yields fell on Monday as stocks tumbled with the spread of the coronavirus in China worsen and the likelihood of aggressive central bank tightening raised the prospect of slowing global growth.

Yet positive yields make investment grade bonds attractive on their own, instead of being the least bad option in a world where losses on government bonds or cash are even worse.

“Ultimately, this could lead investors back to higher quality segments where yields now look attractive,” 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 securities. assets.

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