Global non-financial corporate debt has generally skyrocketed over the past decade, driven in large part by ultra-low, zero, and even negative interest rate policies at several global central banks. Lower rate environment and variations of quantitative easing (QE) measures at certain central banks, including the U.S. Federal Reserve and the European Central Bank (ECB), has spurred investors to assume more risk. Find out more in this video, as well as the full article “The Rising Cost of Junk: European High Yield Bonds In Negative Territory”
Produced on July 17, 2019
Fixed income investors have grappled with higher prices of corporate and government debt in their local markets, while several newswires have recently published reports of at least 14 junk-rated companies that have bonds in the secondary market trading with negative yields. These include Finnish telecoms firm Nokia, Irish paper packager Smurfit Kappa, as well as the European financing arm of U.S. medical tech company Becton Dickinson. To date, lower interest rate environments, combined with several variations of quantitative easing measures at certain central banks, has generally spurred investors to take on greater risk. In fact, ultra-low, zero, and even negative interest rate policies at several global central banks, along with the effects of QE, which has flooded the financial system with liquidity, has been blamed by many in the market for inflating asset prices and responsible for massive debt bubbles.
Continued monetary policy easing at the European Central Bank, for example, has helped push non-financial corporate debt levels across Europe higher by more than 11.3% since it moved to a zero interest rate policy in 2016. Meanwhile, other global central banks, such as the Bank of Japan, the Swiss National Bank, Sweden’s Riksbank and the U.S. Federal Reserve, have also contributed to their respective nation’s elevated levels of corporate debt, having committed to near-zero, zero or negative rates since at least 2008 – this in the wake of the housing market crash and credit crunch.
Against this backdrop, analysts at Janney Montgomery noted that credit and liquidity risks are “not at a minimum by any measure and economic data has been softening, so” some European high yield corporates moving into negative yielding territory “is a reminder that everything is relative.” They added that when regional rates “seem to be lower for longer,” and with the U.S. Federal Reserve’s monetary policy stance switching to become more dovish, “alternatives to pick up yield are becoming few and far between. That thought is driving returns in the U.S. high yield market, which remain above 10% year-to-date.”
Meanwhile, market participants widely expect certain central bank easing to continue, with both the Fed and ECB pointing to escalating geopolitical uncertainties, stubbornly low levels of inflation, and other risks tilting to the downside. Investors will likely be watching the ECB closely, when it meets next to decide on monetary policy in Frankfurt on July 25, while the Fed’s Open Market Committee will also decide on its next interest rate move at the conclusion to its two-day meeting on July 31.
In the meantime, select the Event Calendar option in the IBKR Trader Workstation for a full list of U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs and more. I’m Steven Levine for Interactive Brokers.
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