by This will be a mostly charted recap of where exactly in the rabbit hole of negative yielding corp bonds we are following last week’s knee-shaking sale of some brand new negative yielders by non-state owned Henkel and Sanofi. It was a first. It was exciting. From Morgan Stanley, with our emphasis: We estimate that a total of €467bln of EUR IG bonds now have sub-zero yields. Of this, €313bln of bonds are iBoxx index-eligible, split 39% and 61% between financials and nonfinancials. Thus, ~25% of the EUR IG index is now in negative yield territory, with the concentration increasing to 33% in the CSPP-eligible universe. Negative Yields: Issuers With Largest Amount of Negative Yielding EUR BondsIssuers With Largest Amount of Negative Yielding EUR Bonds – click to enlarge. A quick reminder here that the CSPP is the European Central Bank’s corporate bond buying programme and that the ECB is pushing down borrowing costs for governments and corporates. That done, here’s MS’s distribution of negative bonds across across non-financial sectors: Negative Yields: EUR IG Non-Fin Sector DistributionEUR IG Non-Fin Sector Distribution – click to enlarge. Here’s the overall distribution across countries: Negative Yields: EUR IG - Country DistributionEUR IG – Country Distribution – click to enlarge.
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This will be a mostly charted recap of where exactly in the rabbit hole of negative yielding corp bonds we are following last week’s knee-shaking sale of some brand new negative yielders by non-state owned Henkel and Sanofi.
It was a first. It was exciting.
From Morgan Stanley, with our emphasis:
|
Negative Yields: Issuers With Largest Amount of Negative Yielding EUR Bonds Issuers With Largest Amount of Negative Yielding EUR Bonds – click to enlarge. |
| A quick reminder here that the CSPP is the European Central Bank’s corporate bond buying programme and that the ECB is pushing down borrowing costs for governments and corporates.
That done, here’s MS’s distribution of negative bonds across across non-financial sectors: |
Negative Yields: EUR IG Non-Fin Sector Distribution EUR IG Non-Fin Sector Distribution – click to enlarge. |
| Here’s the overall distribution across countries: |
Negative Yields: EUR IG - Country Distribution EUR IG – Country Distribution – click to enlarge. |
| And finally here’s the ratings breakdown: |
Negative Yields: Ratings Distribution Ratings Distribution – click to enlarge. |
| Of course, Switzerland got there first so we could see this coming. Also, when we say “get used to it” we mean that in the context of it still being more expensive to hold cash or bunds than a negative corp bond: |
Negative Yields: CHF EUR Bond Yields February 2016 CHF EUR Bond Yields February 2016 – click to enlarge. |
| So this isn’t a trend that will disappear quickly. (Update: Today’s moves notwithstanding.)
There are other reasons for that too. As with negative govvies, there are mandates and benchmarks to take into account. As MS say: |
Negative Yields: Cash and Bunds Substantially More Costly to Hold Cash and Bunds Substantially More Costly to Hold – click to enlarge. |
While active managers have anecdotally been reducing their exposure to the ultra-low-yielding ECB-eligible bonds, there are obviously limits to how much tracking error they would like in their portfolios. Furthermore, when markets eventually revise their expectations of further central bank easing, safe credits can still outperform higher-beta assets during periods of volatility.
Finally, MS note trading costs as a reason to stay in what might otherwise seem like silliness:
Another practical constraint that disincentivises trading out of negative-yielding bonds is the associated cost. While by most counts, liquidity has improved in the wake of CSPP, it is yet to be reflected in bid-ask spreads (Exhibit 11). On average, investors still face a 9.3bp cost for liquidity vs. 9.4bp at the beginning of the year. Given the limited avenues for alpha generation, this is a high price to pay for taking a more active approach to managingnegative yield bond exposure in secondary markets.
More in the usual place.
Related links:
Negative govvies: why would ya? — FT Alphaville
In ten years time, what will we think about negative yields? — Duncan Weldon, Medium