In an recent article, Pimco senior vice president Ben Emons said negative nominal interest rates are becoming “commonplace, at least in Europe”.
“Other global issuers have headed there to take advantage of some of the best rates in the world to borrow money,” Mr Emons said.
“To put this in perspective, today about 30 per cent to 35 per cent of the outstanding European government bond universe is trading at a negative nominal yield.”
Nine months ago, that percentage was zero.
“Germany can issue securities with a five-year maturity at a negative yield, and Switzerland recently auctioned negative-yielding 10-year maturity bonds,” he said.
The Swiss example constitutes the first time a 10-year maturity has been issued at a negative rate, Mr Emons added.
In his opinion, investors and issues tend to react differently to negative rates.
“Foreign issuers have flocked to the European bond market to take advantage of record-low funding costs.
“We see this in the European corporate bond market, for example, where US issuers have made up about 31 per cent of the total gross issuance year to date versus 5 per cent to 10 per cent in early 2013,” Mr Emons said.
Mexico, for example, recently issued 100-year maturity sovereign debt denominated in euros at a four per cent yield.
“That is about two per cent lower than what the Mexican government would have to pay in its local market, and investors expressed strong demand for those bonds, since four per cent is high compared with yields on European sovereign bonds,” he said.
But investors need to tread carefully when it comes to negative bond yields, since they will eventually revert to positive, Mr Emons said.
“Reasons vary for why such a reversal could happen. Increased issuance or less private sector demand could cause yields to rise, though ultimately higher nominal economic growth would be required to sustain higher yields.
“For now, subdued growth prospects are likely to keep yields low in countries whose central banks are engaging in quantitative easing.
“The persistence of negative nominal rates in these countries is likely to intensify investors’ search for positive-yielding alternatives,” he said.
