Europe’s Bond Market: Even Further Through the Looking Glass

Companies are borrowing for free thanks to the ECB. But where is investment?

By Richard Barley



The negative-rate experiment grows stranger by the day.

Tuesday brought the sight of not one but two European companies—French drugmaker Sanofi SNY 0.38 % and German consumer-goods company Henkel—selling bonds with negative yields. But it also brought eurozone gross domestic product figures that showed investment didn’t contribute to growth at all in the second quarter.

The bond sales themselves are a strange mix of the absurd and the logical. In absolute terms, it makes no sense at all to pay a company for the privilege of lending it money given the risks involved. But in a world where it costs investors money to hold cash and the European Central Bank is competing with fund managers to buy corporate bonds, Tuesday’s deals are just a sign of the times.

Take Sanofi’s bond sale. The company issued €1 billion ($1.13 billion) of bonds maturing in January 2020 that will pay no interest and yielded minus 0.05%. German government bonds with a similar maturity yield minus 0.68%; even Spanish bonds due early 2020 carry a negative yield. Investors are actually getting paid a bit more versus German bonds for buying this security than for buying a six-year bond that Sanofi also sold Tuesday. That is unusual, since longer-dated debt is riskier from a credit perspective than debt that will be repaid relatively quickly. Were bond yields to rise, the relatively short maturity means that this bond may offer some protection, too. Framed like that, ignoring the outright yield, an argument can be constructed that the bond is relatively attractive.

And it is hardly as if there are masses of easy, attractive options elsewhere. Fund managers who are limited by their mandates to buying mostly investment-grade bonds face low yields across the board: There are €143.7 billion of corporate bonds carrying a negative yield and €1.25 trillion yielding less than 1%, according to Société Générale. SCGLY 0.27 % Startlingly, the high-yield market isn’t far behind. Short-dated debt from companies like HeidelbergCement HDELY 1.17 % and French car maker Peugeot PUGOY 1.54 % yields 0.2% or less, according to Bank of America Merrill Lynch.

The ECB has, in effect, made borrowing free—at least for large companies with access to bond markets and with decent credit ratings. But investment is still the missing ingredient in eurozone growth, which is being driven mainly by consumer spending. It showed signs of picking up last year: Investment in the fourth quarter of 2015 was 3.7% higher than a year earlier, the highest rate of expansion recorded since the global financial crisis, according to Eurostat data. But it has since slowed again, and overall has remained sluggish compared with precrisis levels even as borrowing costs for companies have sunk to unprecedented levels.

Central bankers are producing remarkably easy financing conditions—and hence extraordinary outcomes in financial markets. The economic outcome so far, unfortunately, is proving much more mundane.

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