The quest for positive yields

The negative-yielding phenomenon has spread to the High Yield corporate bond space
Chief Investment Office18 Jul 2019
Photo credit: AFP Photo

What should we call High Yield (HY) bonds that have negative yields?

For the first time, negative yields have crept into corporate junk bond markets. Selected HY bonds are now starting to offer sub-zero yields in a space where investors traditionally hunt for higher yields in riskier companies.

In Europe, about 2% of the HY market offer negative yields, including bonds issued by tech-equipment company Nokia Corporation, telecom giant Altice France SA, and aluminum products manufacturer Constellium NV. The only way to make money from negative yielding bonds would be to hope that rates/yields go even more negative.

The amount of negative-yielding debt in the global Investment Grade (IG) space remains elevated at around USD13t, which is 23% of the global IG universe.

These negative-yielding bonds also seemed to have compressed US Treasury (UST) term premium, distorting signals sent by the US yield curve which, if true, could have reduced the reliability of the US yield curve as a recession predictor. The sum of negative-yielding bonds (both IG and HY) looks set to increase further, at least in the short term, as markets price in further monetary easing from G-3 central banks. That is true especially in Europe, where incoming European Central Bank (ECB) President Christine Lagarde – due to start 1 November – is expected to continue the central bank’s dovish policy.

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