European debt investors’ appetite for negatively yielding corporate debt continues unabated as both the European Central Bank (ECB) and the Bank of England included these asset classes in their respective quantitative easing programmes.
S&P Global Ratings has released research as to why investors are essentially willing to pay for the privilege of holding major corporates’ debt. It said central bank programmes of bond purchases mean that there are two new large buyers of bonds in the secondary–and potentially primary–markets, which therefore creates a technical factor to increase demand.
Also, with the ECB maintaining its benchmark interest rate below zero, banks are charging some corporate customers to hold their deposits. This makes negative-yielding corporate bonds a justifiable investment proposition for funds and investors holding deposits at lower negative interest rates with banks or buying European government bonds, which have even more negative yields.
Investment-grade German rail operator Deutsche Bahn AG, France-based pharmaceuticals group Sanofi, and Germany-based consumer goods and adhesives group Henkel all recently managed to place bonds with negative yields.
However, although Europe is currently borrower-friendly following ECB monetary policy decisions, there have been signals that this may change. There was a brief widening of spreads when the ECB announced that it had no plans to expand its current stimulus program during its September meeting. Also fears over the future of Deutsche Bank continue to play a role for certain issuers’ access according to S&P.
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