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Learning to live with negative yields

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When E.On raised the curtain on the autumn corporate bond issuing season in euros a fortnight ago, a dramatic tableau was revealed.

Until then, negative yielding new issues had been freaks, appearing only when a highly rated issuer lobbed a short bond into a particularly tight rates market. E.On showed an alarming new world, in which even an ordinary triple-B rated company could issue five year debt at minus 0.15%.

Would investors tolerate it or rebel? Was half the corporate bond market about to go negative?

Two weeks on, the shape of the new landscape is becoming clearer. The short end of the curve, especially for better rated issuers, is now a negative yielding pond. This week, among more than €20bn of issuance, no one entered it with a publicly priced deal.

Instead, most issuers brought bonds of six years and longer. Danaher and AT&T, issuing large deals, both picked 6.5 years as their shortest tranches. But they explored fully the highlands beyond 10 years, pricing between them €5.75bn of such paper. Danaher’s 30 year paid a princely 1.82%.

So there is plenty of room in the market for issuers to avoid the pond — and for corporate treasurers it is a playground of ultra-long, ultra-cheap funding.

But negative yielding deals are not impossible, either. Investors do not love them, and some of the issues last week have traded soggily. But they will buy them, from good names. Asset managers often care more about spread than yield.

So an accommodation has been reached. Companies have negative yields open to them, if they want. But they may often get tighter execution by playing nice with investors and paying them a few cents.

You could almost call it an equilibrium. Until the next lurch…

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