Capital Markets Weekly: Negative-yielding bonds grow over 75% since early 2018

Overview

After last week's rush of emerging markets and bank capital deals, supply has eased. This week's highlights include the Netherlands' announcement of imminent plans for a debut Green Bond, and the return of Germany's reference 10-year Bund to negative yields. Sharjah's USD1 billion sukuk and USD700 million for Russia's Evraz were the largest emerging market deals. Also, of note was an AT1 deal for Bank of Georgia, the region's first. Announcements on funds flows continue to indicate support for the bond market, while looking less positive for equities.

Negative Yielding Debt

Germany's 10-year Bund has fallen to negative yields for the first time since 2016, closing on 22 March at -0.02%. It started 2019 at 0.24%, and its 2018 peak in May was at 0.65%. It now stands at -0.04%. The Financial Times cited Bloomberg data on 26 March 2019 noting that over USD10 trillion of outstanding government debt is once again trading at negative yields. In early 2018, this had reached a low of USD5.7 trillion, having last been at its current levels in September 2017.

New Issuance

This week's largest Emerging Market bond issue was a USD1 billion sukuk for the Government of Sharjah. The seven-year deal was priced at 155 basis points over mid-swaps versus guidance of 180 basis points, with demand reaching USD4.3 billion. Additionally, Russian natural resources and steel company Evraz sold USD700 million of five-year debt at 5.25% in conjunction with a tender to repurchase its 6.5% April 2020 issue: of the USD700 million outstanding, USD580.5 million were tendered. Additionally, Indian National Railway Corporation, the state-owned finance arm of Indian Railways, sold USD500 million of five-year bonds at 3.73%. It was followed by power company NTPC, which arranged a deal with the same parameters at 3.75%.

Also, from India, Reliance Industries is set to become the first Indian borrower to tap the German private placement or schuldschein market. It is reportedly raising USD170 million equivalent from the transaction.

Bank of Georgia, the country's largest bank by assets undertook an AT1 deal, described in the bank's statement as the first AT1 issuance from Georgia and the South Caucasus region. It sold a quasi-private placement of USD100 million of perpetual debt priced at 11.125% versus price guidance of a low to mid-11% coupon until first call after 5.25 years. The deal follows the recent introduction of Basel III regulations in Georgia. Archil Gachechiladze, Bank of Georgia CEO noted that the deal permitted the bank to diversify its capital structure while providing "a natural hedge against dollarization in the economy".

Other

In a statement on 22 March, the Dutch State Treasury Agency (DSTA) announced that it will seek EUR4-6 billion from a Green Bond sale with a term of 15 years or longer. The Agency will announce full details on 8 April.

According to Bank of America Merrill Lynch data, USD20.7 billion was withdrawn from equity funds in the week to 20 March. Of this, USD13.7 billion was from US equities, and USD4 billion from European stock funds. This reversed a USD14 billion inflow to equities BAML had recorded the prior week. For the year to date, its data shows an aggregate outflow from equities of USD66.8 billion. By contrast, USD12.1 billion went into bond funds, the largest weekly inflow since January 2018.

Our Take

After last week's exceptionally active supply, it's perhaps unsurprising that this week has been quieter. In recent weeks we have expressed repeated concern over the apparent conundrum of the strength in equity markets against the background of forecasts of slower growth in the USA and EU, and limited inflows to equity funds. The latest data continues to indicate that debt markets enjoy far stronger underpinning at present.

Outstanding levels of negative-yielding bonds have moved back to 2017 levels. Much of the negative yield bond stock is European, reflecting the negative levels of the ECB's policy rates, but the current configuration is now being maintained without the benefit of ongoing monthly support to the market from the ECB's Asset Purchase Program. As such, it is a strong indicator that the markets now expect European policy rates to remain negative for some time to come, and that "rate normalization" will be an extended process.

The planned Green Bond debut by the Netherlands follows precedents set by other sovereign borrowers such as Belgium and Ireland in the recent past. Given the growing number of funds which specify "ethical" objectives for investment, such financing should offer at least marginal benefits in terms of the range of distribution, even if actual price savings appear limited at present. Further such precedents are likely.

Posted 29 March 2019 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit