credit Markets

Back To The Twilight Zone: Companies Get Paid To Borrow During Pandemic

Nothing gets the crowd going quite like negative rates.

“Perversion” is a term that invariably gets bandied about whenever this or that person endeavors to riff on the subject.

It’s not enough to call negative rates “counterintuitive” — that’s far too tame. We have to inject an element of the taboo in order to make a point about just how sickened we are by the prospect of paying someone for the “privilege” of loaning them money.

More often than not, this discussion is couched in totally hyperbolic terms and leans on nebulous emotional appeals to generic savers — someone’s grandmother was forced to work in a coal mine until she finally bit the (literal) dust at 96, because she wasn’t able to earn enough on her life savings to retire comfortably.

If only nana’s CDs and money market funds yielded 4%, she wouldn’t have been forced to live out her final years swinging an axe in the subterranean hollows of West Virginia.

I jest. But only a little. Negative rates are a topic that serves as endless headline fodder for financial media outlets. This discussion also helps prop up the (dollar-denominated) bank accounts of online pundits and propagandists peddling populism, championing Bitcoin, and talking up the merits of holding physical gold in your basement. The more references to unnamed, beleaguered senior citizens with savings accounts yielding nothing the “better.”

I try to avoid trafficking in that kind of content whenever possible — that’s not why people are here. But one phenomenon I do find compelling for the almost philosophical nature of the questions it raises is the prevalence of negative-yielding corporate debt.

Obviously, this is a subject I’ve broached on any number of occasions, but I thought the following chart sent around Wednesday by Deutsche Bank’s Jim Reid was worth highlighting.

“Over 35% of all global government debt and 25% of total global debt now has a negative yield and is edging closer back to the record highs seen towards the end of August last year,” Reid wrote. In August of 2019, you’ll recall, the global stock of negative-yielding debt hit ~$17 trillion amid a furious bond rally catalyzed by growth concerns around escalating trade tensions and, stateside, the pile-on effect from convexity flows.

But the light-purple line in the figure (above) is far more notable (or at least more interesting). As Reid goes on to say, “negative yielding corporate debt (currently around $1.1 trillion) is getting back close to its all-time highs again as a % of outstanding after being at zero as spreads aggressively widened just after the pandemic hit.”

He calls that “remarkable, given the savage recession.”

Indeed it is remarkable. Consider what it means. Despite some understandably bleak assessments of the operating environment for corporations in the post-COVID world, some companies are able to borrow at negative rates. In the middle of a deep recession.

This too is reminiscent of last August, when, in Europe, entire corporate curves went negative.

Consider what that means: Conceptually, those companies can mint “assets.” At one point last year, some “high”-yield debt sported negative-yields, a state of affairs dubbed an “unfortunate oxymoron,” by one bank. The chart below is from summer 2019.

Central banks have obviously kept the doors open for corporate issuance in 2020, while driving risk-free rates into the floor (in locales where they weren’t already there) thereby creating demand for corporate credit, which in turn pushed down yields.

Howard Marks weighed in on this last October, and his comments (posed as questions) are perhaps even more germane now given the explosion of corporate leverage associated with the pandemic.

“How will the markets value businesses that hold cash versus those that are deep in debt?,” Howard wondered, noting that “traditionally, markets have penalized heavily levered companies and rewarded those that are cash-rich.”

But how does that change when negative rates effectively convert liabilities into assets? “If having negative-yield debt outstanding becomes a source of income, will levered companies be considered more creditworthy?,” Marks went on to ask.

For his part, Deutsche’s Reid notes that “these high global numbers [for negative-yielding debt] are more remarkable due to the fact that the huge US debt market remains in positive yield territory across the curve”.

“If this ever goes negative, then these numbers will get a huge boost,” Reid went on to say.


13 comments on “Back To The Twilight Zone: Companies Get Paid To Borrow During Pandemic

  1. Emptynester says:

    I used to worry about how “screwed up” the world would be if the Federal Reserve started buying equities (Japan)…….now I remove emotion and common sense and simply evaluate the most relevant factors (regardless of whether I agree or like it) to guide my investment decisions.
    I do hope that in my lifetime, the market reverts to being based upon fundamentals— ahhh, those were the days!!

    • runamok says:

      Yeah, I have personally had biases that this cannot go on because it’s against the orthodoxy I was brought up in. Any longer, I don’t think it’s possible to go back. More and more, I’m looking at markers that indicate the end of the current regime. Example include digital currencies forthcoming from central banks, the IMF motioning for a New Bretton Woods, negative rates for cash currency deposits, deposits into digital dollar accounts for the most needy (who would spend it all), and the utter impossibilities of servicing debt if rates rise.

      A reset is coming. I’ve given up on going back to the system that was. I’m trying to keep my ear to the rails on what is going to happen and when.

      • derek says:

        Yes, upends much of the classical economic theory we were taught, eh? It also upends the Calvinist view of debt as an evil failing which pervades US and German culture.

        • Remember, none of this stuff is actually real. And that’s the ultimate tragic irony. We’re going to end up living (or not living) on an uninhabitable planet because we talked ourselves into believing that debt, deficits, money, corporations, and all manner of other things that, objectively speaking, ARE NOT REAL, matter more than things like air, water, animals, ecosystems, making sure large swaths of people don’t starve, making sure people have healthcare and are educated, etc.

          It’s the silliest thing imaginable. We (humans) are literally allowing ostensible “limits” and “constraints” associated with a whole laundry list of things we totally made up to slowly kill us as a species.

          150 years from now, humans are going to be living out the first hour of “Interstellar.” Instead of worrying about preventing future generations from literally suffocating, we spend every day worrying about the “value” of make-believe, digital “assets” that only exist on a computer screen and telling each other objectively ridiculous fairy tales about government spending.

          None of this stuff is going to matter within two centuries. None of it.

          • MC says:

            My optimistic side hopes this election will turn the Titanic; my pessimistic side fears for my grandchildren.

          • Joey says:

            H, this one comment is bigger than anything else we discuss on this site. Not only are we raping the planet in service of imaginary things, we have created a system where all of the resource-extractive economic activity we do (e.g. shopping on Amazon) goes to feed the wealth of a few eccentric billionaires (soon to be trillionaires). And what do they want to do with all of the wealth they have amassed? Elon Musk and Jeff Bezos are in a race to colonize Mars. We are making the Earth uninhabitable so that Elon Musk and Jeff Bezos can fulfill their dream of escaping a dead Earth to live on an even less-inhabitable rock in the sky.

          • Mr. Lucky says:

            Leaving earth. Well first we can’t do that with negative rates. Besides we’ll just take the same stupid us to another place. Big whoop! You’re an optimist if you think mankind has two centuries left. I won’t see the end of this century but neither will the rest of mankind. There will be bears ….

          • calh0025 says:

            This is definitely my thought as well… in as much as “economics” as an academic study exists it is devoid of adequate tethering to the concrete physical reality. You cannot have “externalities” in economics and have it reflect reality. We’re well past the point where you can just approximate the earth as a nigh infinite pollution absorber and raw material provider. Either we begin the hard work of balancing the real books like energy production, mineral extraction and recycling, habitat protection, agricultural revolution to modern technology like aeroponics and vertical farming… or we will witness the collapse of global civilization AND the next time around we will not have vast reservoirs of petrochemicals to assist in our development. There is a real chance this is make or break time for humanity as an intelligent species, either we crack through the eggshell or we die inside.

  2. Axiomatic says:

    Would be curious to know which companies (or governments?) are issuing negative yield Euro HY bonds.

  3. Anaximander says:

    At the end of 2019, 40% of US equities had negative tangible book value. I don’t have updated figures, but after all the new debt lately, I presume the number is closer to 50% now. Granted software is eating the world, but is it possible to defend this situation as something other than an absurdity? I’d wager the odds are at least as likely as not that “goodwill”, a euphemism for lots of bad acquisitions, and other intangible assets are worth less than their book value, certainly far less than the 3-4x book prices of the current market.

    These negative rates are an expression of the private sector literally begging a few good corporates to invest capital productively, and a reflection of the dearth of good investment actually happening in the private sector. I’m with Albert Edwards that this is all a reflection – and an exacerbation of – the ongoing zombification of the private sector. It fits perfectly with its monopolization. This is the K within the K of the “recovery”. Both legs of the K are fundamentally protectionist, clogging up the competitive playing field for growth.

    We should have learned from Japan that when private sector investment is perpetually in shortfall, government investment must step in to more than fill the gap, or else it’s stagnation all the way down. It’s a fiscal matter and only a fiscal matter, but also a question of the composition of fiscal spending. The key word is ‘investment’. So far, everything done and everything proposed, is just partially filling a hole. They don’t get it yet. I suppose as long as the prevailing views refer to education and health care and such as “entitlements” and not “investments”, they won’t get it.

    • joesailboat says:

      Healthcare should be considered a utility. Several aspects of the economy should be considered as utility.

      • Mr. Lucky says:

        Thanks for that 40% number — largely an outcome of buybacks — I hadn’t seen it before. As one who studied corporate finance in the “old days” I came to believe that real capital structures mattered. I have a bunch of KMB stock, have had it for years, negative net worth for most of the last five years and yet it still carries a credit rating of ~A. Should be C, but who’s looking?

      • calh0025 says:

        Yeah if we had a government of, by and for the people then we would at minimum have internet, higher education and healthcare as utilities or government services.

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