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