2 Of Nestle's Bond Issues Produce Negative Yield

Published 02/08/2015, 12:26 AM
Updated 05/14/2017, 06:45 AM

This could be a first for corporate bonds with a maturity greater than one year…

Two of Nestle SA PK (OTC:NSRGY)'s bond issues have traded with prices that produce a negative yield to maturity.

Now, if you’re thinking that you don’t have to be concerned about bonds from a foreign issuer, issued in a foreign currency, trading all the way across the Atlantic…

Think again!

Developments like this are indicative of tectonic shifts that impact every investor in the world.

Luckily, we’re working on a way to protect you from any collateral damage.

Performance Anxiety

Now, these bond prices are in secondary markets, so Nestle technically isn’t getting paid to borrow – but for all we know, that could be the next step in what I coined the fixed-income fifth dimension.

Meanwhile, Nestle is the largest food company in the world as measured by revenue – so even though it may be an ultra-credit-worthy borrower, default is still possible (though improbable).

Therefore, negative yields show the intensity of the “reach for yield” phenomenon, the scramble for collateral, and the flight from negative deposit rates at banks in Europe.

The global financial markets are more interconnected than ever before. Thus, an epic search for yield in Europe impacts our investments back home.

So producing a safe yield isn’t going to get any easier – more likely, it’ll get harder as central banks around the world continue to lower short-term interest rates.

The following countries have already seen rate cuts this year: Albania, Australia, Canada, Denmark, Egypt, India, Jordan, Pakistan, Peru, Romania, Switzerland, and Uzbekistan.

Russia and Turkey also cut, but had hiked rates last year in an attempt to stem currency declines.

Finally, The People’s Bank of China recently announced a cut to banks’ reserve requirement ratio. Although not quite analogous to a short-term interest rate cut, it’s still designed to stimulate lending. But is more credit and malinvestment really what China needs?

Government tinkering around the world is one major factor that’s making it exceedingly difficult to manage our investments.

It’s no secret that these are confusing times, and even many investment professionals are completely baffled by what’s transpiring.

Indeed, outperformance has become scarce. In 2014, active large-cap stock funds posted their worst comparative showing in 30 years, according to Lipper.

Many hedge funds employ the best and brightest, so it’s also surprising to discover that the HFRX Global Hedge Fund Index has returned just 5.3% (net of fees) for the entire period from 2010 through 2014. Poor performance has led to hedge funds closing at a rate not seen since the financial crisis.

Bottom line: This is an investing environment unlike any we’ve ever experienced. Previously unfathomable events – like corporate bonds trading with negative yields – are occurring, and will continue to occur.

Alan Gula, CFA

Original post

Latest comments

Loading next article…
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2025 - Fusion Media Limited. All Rights Reserved.