Negative Yields in Corporate Bonds Have Gone Extinct

Negative yields have vanished from the world’s corporate bond market as investors brace for monetary tightening.

Every single note in a Bloomberg index tracking the global investment-grade corporate bond market yielded 0 percent or more at Friday’s close, calculated using the midpoint between bid and ask prices. It’s a dramatic turnaround from August, when more than $1.5 trillion of debt—most of it in Europe—came with a subzero yield.

This milestone marks the end of an era fueled by easy money and extraordinary central-bank policy meant to hold down borrowing costs and stimulate inflation. That was sparked by a combination of the financial crisis and the European debt crisis, followed by the outbreak of the pandemic. Now it’s all going in reverse. Bond yields are soaring around the world, and investors are worried that inflation is getting out of control.

The Bloomberg global corporate bond index is now yielding about 3.7 percent, its highest since March 2020, jumping from 1.3 percent at the end of 2020. Bonds of Credit Agricole SA, Nestle Finance International Ltd., and Switzerland’s SGS SA were among the last to yield below zero, according to data compiled by Bloomberg.

“This development makes the global credit market more attractive now,” said Christian Hantel, a senior portfolio manager at Vontobel Asset Management AG, which oversees fixed income worth 52.1 billion Swiss francs (US$54.5 billion). “We always maneuvered around these negative-yielding securities, as they do not add value.”

The U.S. investment-grade cost of funds almost doubled this year as government bonds slumped. The yield to worst on the benchmark Bloomberg high-grade index closed at 4.25 percent on Friday, not far from the post-global financial crisis peak struck in March 2020.

Cheaper bonds may lure buyers, said Vishal Khanduja co-head of U.S. multi-sector, broad-based markets fixed income at Morgan Stanley Investment Management.

“It becomes an attractive first entry point,” Khanduja said in an interview on Monday. “I’m sure the volatility is going to be a lot more going forward, so I think you’d have a few more entry points.”

Rate Prospects

Federal Reserve Chair Jerome Powell outlined his most aggressive approach to taming inflation to date last week, potentially endorsing two or more half-percentage-point interest rate increases while describing the labor market as overheated. Meanwhile traders are betting the European Central Bank (ECB) will raise rates above zero this year for the first time since 2012, after a string of hawkish comments from policymakers spurred speculation the bank is priming the market for faster-than-expected monetary tightening. The ECB’s deposit rate is currently at a record low of minus 0.5 percent.

Negative yields have been a mind-bending phenomenon for even the most experienced fund managers. On one level, the return of positive yields is good news for anyone that’s buying a bond and plans to hold it to maturity.

Subzero yields briefly disappeared at the start of the pandemic, only to reappear days later as central banks pulled out all the stops to keep economies afloat. Most strategists say positive yields will remain as long as the ECB holds onto its hawkish stance.

“For negative yields to return to euro investment-grade, a hiking cycle has to be priced out or reversed,” said Song Jin Lee, a credit strategist at HSBC. “In that scenario, we are talking about a material growth slowdown, maybe even a Eurozone recession.”

Yield Outlook

Marco Stoeckle, head of corporate credit research at Commerzbank AG, said yields in Europe will likely creep higher “in a back-and-forth fashion rather than a straight line. … Yields below 2 percent are still rather low if you look back beyond the last decade, and real yields still are—and likely also will remain—negative.”

Government bond yields were falling on Monday while equities slumped as the spread of the coronavirus in China worsened and the likelihood of aggressive central bank tightening raised the prospect of a slowdown in global growth.

Still, positive yields are making high-grade bonds attractive in their own right, instead of the least-bad option in a world where losses on government bonds or cash holdings are even worse.

“Ultimately, it could draw investors back to higher-quality segments where yields now look compelling,” said Alex Eventon, head of investment-grade credit at Edmond de Rothschild Asset Management, which oversees 8.5 billion euros ($9.1 billion) of fixed-income assets.

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