“This has been no ordinary episode of reaching for yield by investors”, BofA’s Barnaby Martin wrote Friday.
That’s an understatement. 2019 (and August especially) has been defined by increasingly surreal developments in fixed income, including, among other things, entire government curves going negative, 100-year bonds posting penny-stock-esque returns, zero coupon 30-year issuance, the normalization of negative-yielding investment grade credit in Europe and, of course, the appearance of negative-yielding “high” yield debt, the ultimate oxymoron.
The distortions come amid an increasingly dour outlook for global growth, trade frictions, collapsing inflation expectations and the assumption that central banks will be forced to persist in accommodation in virtual perpetuity.
As BofA’s Martin exclaims, describing the chart above, “a quarter of the world, in GDP terms, is now subject to negative central bank rates and a fifth of the world is now living with negative 10yr yields”.
That, in turn, ripples down the line, and manifests itself in increasingly absurd ways or, as Martin puts it, “eye-watering relationships [are] popping-up on an almost daily basis”.
For example, the market cap of bond-proxy Nestle has now converged on that of the entire European banking sector.
If things keep going the way they’re going from a policy perspective, that trend will continue. After all, tiering is a stopgap measure to avoid further damage to banks from even lower (i.e., even more negative) rates, not a cure-all for damage that’s already been done. Flatter curves, more negative rates and the prospect of another crisis in Italy do not bode particularly well for European financials.
Although the following chart can’t be solely explained by reference to the manic global hunt for yield, some of it can. Nearly a quarter of global 2s10s curves are inverted.
And nearly 10% of 2s30s curves are “upside down”, if you will.
More alarming still, â‚¬1.1 trillion of European corporate bonds now yield less than zero. That, Martin marvels, is half of the entire â‚¬ IG corporate credit market.
It gets better. BofA goes on to note that “there are now 100 different issuers in the Euro-denominated credit market that have all of their corporate bonds yielding below zero”. Let that sink in. There are 100 companies in the â‚¬ debt market whose entire curve is negative. In a sense, debt as become an asset for those corporates.
Clearly, that will incentivize issuance. Those companies can essentially mint assets. “The risk is that companies begin to view negative yielding debt more as an ‘asset’ going forward, rather than a ‘liability’ and hence issue more of it”, Martin says, in a kind of pseudo-lament.
So, just to be clear, when considered in conjunction with the fact that total returns on long-end German and French bonds outstrip returns on German and French stocks in 2019 (and it’s not even close, by the way), what you come away with is a situation where, across the pond, bonds have become stocks and liabilities have become assets.