By Josie Cox and Emese Bartha
As the full force of the European Central Bank's blockbuster
asset-purchase program continues to bear down on debt markets,
negative yields on sovereign bonds in the region look likely to
become the new normal.
On Wednesday, Finland became the first nation in the region to
pay a negative yield on five-year debt sold at auction, suggesting
that investors are unperturbed by the country's weak economic
expansion and its dependence on troubled Eastern Europe.
Finland's exposure to Russia, both geographically and as an
export partner, makes its government debt riskier than that of
other countries, but this in turn demonstrates just how fierce the
demand for eurozone government debt has become.
German government bonds offer negative yields on maturities up
to six years, according to Tradeweb, as do bonds issued by Denmark.
Five-year government debt carries a negative yield in the
Netherlands, Austria, Sweden and Finland, and four-year government
debt in France and Belgium.
In Switzerland, bonds with a maturity of up to a staggering 13
years offer less than zero in terms of yield, and with the U.S.
Federal Reserve broadly expected to raise interest rates later this
year--exacerbating monetary policy divergence between the two
continents--the trend is tipped to continue.
But Finland's venture into negative territory nonetheless marks
a significant juncture.
Following two consecutive quarters of mild economic expansion,
Finland's gross domestic product is expected to have contracted in
the fourth quarter.
Sanctions on Russia by the West and the subsequent
counteractions have been a major drag on the Finnish economy, with
exports to Russia posting a 13% annual decline.
"In this situation it is clear that liquidity is dominating
fundamentals, " said Richard McGuire, a fixed-income strategist at
Rabobank in London. "The market is simply focused on the wall of
liquidity that is coming its way and what effect that will have on
the whole market."
Finland's 10-year benchmark government bond was trading around
0.38% Wednesday, down from almost 2.2% at the start of 2015.
Alberto Gallo, head of macro credit research at Royal Bank of
Scotland Group PLC in London, said that there are now around EUR2.5
trillion ($2.8 trillion) of sovereign bonds trading with a yield of
below 0.1%, equating to 34.8% of the total market. J.P. Morgan
earlier this month calculated there are currently EUR220 billion of
bank reserves subject to negative interest rates, and that this
figure will increase exponentially because of the ECB's forthcoming
colossal bond-buying program.
Debt due to be sold at auction by the Netherlands, Sweden,
Switzerland, Germany and even the Czech Republic over the coming
weeks, could price with a negative yield too.
Following a hotly anticipated monetary policy meeting in
Frankfurt last month, ECB President Mario Draghi said that the bank
intends to start flooding the eurozone with more than EUR1 trillion
in newly created money, sparking a rally in stock and bond markets
and sending the euro plunging.
Germany's DAX stock index--which has risen more than 10% so far
in 2015--hit yet another all-time high Wednesday, which analysts
largely attributed to the anticipation of quantitative easing, or
QE.
The yield on the country's 10-year debt dipped well below 0.3%,
undercutting the yield on Japanese 10-year debt and marking a
euro-era low.
Alessandro Tentori, head of rates strategy at Citigroup, said
that the "the stigma of negative interest rates" had now completely
disappeared.
The yield on a four-year euro bond issued by Kitkat-maker Nestlé
SA turned negative on Tuesday, making it one of the few companies
ever to see the yield on its debt with a maturity of longer than
two years fall below zero.
Consumer goods company Unilever PLC last week sold EUR750
million of seven-year debt offering a yield of just 0.653% at
pricing.
"Even though the ECB won't purchase private corporation debt,
aside from covered bonds, the effect of the anticipation of QE is
having profound consequences," said Mark Harmer, a fixed-income
strategist at Dutch Bank ING in Amsterdam.
Commenting on Nestlé's yields turning negative, Jim Reid, global
head of fundamental credit strategy at Deutsche Bank, said that,
considering the "absurdly low yields" on sovereign debt, "it was
perhaps only a matter of time before we saw corporate
euro-denominated yields follow suit."
"Maybe chocolate is the new gold."
Write to Josie Cox at josie.cox@wsj.com and Emese Bartha at
emese.bartha@wsj.com
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