authored by

John Kierans
August 2019

Traditionally bonds sought to provide investors with an income stream – coupon payments.  Alternatively an investor might buy a bond at a discount, for example give €95 to receive €100 in a year.  In short, the investor is offered a profitable outcome.  But how do you value a bond that offers guaranteed losses?  Our capital markets today offer a cornucopia of bonds that guarantee losses for investors.

Ireland borrowed €500m at a yield of -0.54% in June.  If investors hold the bond until maturity (11 months) they will get paid back €497.5m for a guaranteed loss of -€2.5m.  This is not unusual, in fact half of Europe’s sovereign debt and all of Japans sovereign debt trades at prices that guarantee losses.   A quarter of European corporate bonds trade at negative rates.

There is no good enough reason to pay somebody to borrow money from you.  But tell that to the investors who lent handbag manufacturers Louis Vuitton €300m at negative interest rates this year.  Even non-investment grade / junk bonds are trading at negative rates.  Junk bonds are bonds issued by companies that are deemed to have a high risk of default.  

Here is a list from Bloomberg of junk bonds trading at negative rates:

1. Ardagh Packaging Finance plc /Ardagh Holdings USA Inc.

2. Altice Luxembourg SA

3. Altice France SA

4. Axalta Coating Systems LLC

5. Constellium NV

6. Arena Luxembourg Finance Sarl

7. EC Finance Plc

8. Nexi Capital SpA

9. Nokia Corp.

10. LSF10 Wolverine Investments SCA

11. Smurfit Kappa Acquisitions ULC

12. OI European Group BV

13. Becton Dickinson Euro Finance Sarl

14. WMG Acquisition Corp.

Investors in these bonds are guaranteed to lose either some of their money if they hold the bonds until maturity or all of it if the borrower fails.  A full pay out on the bond equates to a loss because of the negative interest rate and that is the best outcome an investor can hope for.  

This is not a small quirk in the markets.   The Financial Times has calculated that more than $12.5tn of bond debt trades at negative yields.  To put that number in context consider that the $12.5tn roughly equates to the entire stock market valuation of the following countries combined, Japan, France, UK, Germany, Switzerland, Holland, Spain and Italy*.  

Going forward investors holding negative yielding bonds can only profit if yields become even more negative or more out of whack.  If this doesn’t happen they are guaranteed to endure losses.  This may be the very definition of a speculative market - I would argue a highly speculative market.

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