Today was another historic day in the monetary twilight zone that is Europe, when two large European, non-financial companies were the first in history to be paid by investors to borrow, courtesy of the ECB's corporate debt monetization program, which has unleashed an unprecedented scramble for frontrunning the central bank's purchases of corporate debt and a historic collapse in bond spreads.
As the WSJ reported earlier, German multinational Henkel AG and French drugmaker Sanofi SA are set to pay, pardon collect, a yield of minus 0.05% on new issues of short-dated bonds on Tuesday. The German household products is set to sell €500 million of two-year bonds that yield negative 0.05 percent, while Sanofi will be paid to issue three-year debt.
As the WSJ conveniently adds, in case someone was still unaware, "the fund raising is another sign of how unprecedented monetary policy has turned conventional investment theory on its head."
Roughly €717 billion of eurozone investment-grade bonds traded at a negative yield as of the end of August, or over 30% of the entire market. The ECB had bought over €20 billion of corporate bonds as of Sep. 2, after launching its program in early June, with most of its purchases coming in secondary markets. The result is shown in the charts below:
In a note by Bank of America's Barnaby Martin yesterday, the strategist said he was starting to "think the unthinkable", namely what happens when double-BB names slides into the negative yielding category.
"such has been Draghi's influence across the whole credit market that we are close to seeing our first negative yielding BB-rated bond. But if debt costs for speculative grade companies become "inverted", then the economics of LBOs will be transformed, and the quality of the assets they are buying will become secondary. We see a growing risk that another private equity cycle emerges in Europe now, and the severe rating deterioration that LBOs pose would become the greatest challenge to central banks' credit buying."
It's only a matter of time before the ECB also makes the unthinkable all too real. The central bank meets on Thursday and will decide if it should expand its current bond-buying program; as Reuters and the WSJ hinted previously, the ECB will soon be "forced" to buy equities, further distorting the market.
The new debt sales mark a burst of issuance following the traditional summer lull in local capital markets. According to the WSJ, Glencore - which last year was locked out of debt markets - is also raising cash on Tuesday in one of its first forays into capital markets since its shares and bonds were sold off last fall amid concerns over debt levels and falling commodity prices. To be sure, while the fundamentals facing the company are still as dire as ever, the fact that the ECB provides a guaranteed backstop assures that anything the Swiss commodity has to sell will be promptly soaked up by the yield-starved market.