Siemens just borrowed $1.6 billion without offering a penny in interest. it’s another sign that investors are betting that rates are going to fall even further as storm clouds gather over the global economy.
The German industrial conglomerate this week borrowed €3.5 billion ($3.8 billion) from investors in the lowest-yielding bond issueever recorded by a company, according to a source familiar with the transaction.
Siemens (SIEGY) borrowed €1.5 billion euros ($1.6 billion) over two and five years. Those bonds offered a zero coupon (interest rate) and were priced with negative yields, meaning investors are effectively paying to lend the company money if they hold the debt to maturity.
The remaining €2 billion euros ($2.2 billion), borrowed over 10 and 15 years, offered tiny rates of interest.
The two-year note, whose yield reached minus 0.315%, was “the most negative yielding corporate bond ever to be priced in the primary market,” the source said.
Siemens declined to comment.
An ‘extraordinary’ market
The Siemens sale highlights the unusual state of the global bond markets as concerns about economic growth start to build.
Corporations and governments, especially in Europe, have the opportunity to tap incredibly cheap borrowing as investors chase rapidly diminishing returns, or simply a relatively safe place to park their cash.
“Some extraordinary things are happening in euro corporate bonds rights now,” said Jonathan Gregory, head of UK fixed income and senior portfolio manager at UBS Asset Management.
He said that a quarter of all corporate bonds in Europe now have negative yields.
To some investors, even negative-yielding corporate bonds look more attractive than government debt right now. German government bonds have hit record low yields as demand shoots up, indicating concernabout the rising risk of recession in Europe’s biggest economy.
Prices and yields move in opposite directions. Germany’s two-year debt currently carries a yield of minus 0.912%.
Investors are also preparing for the European Central Bank to cut interest rates when it meets in September. They’re already in negative territory and at historic lows.
Additionally, the ECB may announce that it’s relaunching its bond-buying program as part of an effort to stimulate the region’s economy. Should that happen, yields will continue to fall. Investors can then turn around and sell the bonds before they reach maturity for a profit.
ButGregory at UBS warned that some investors were getting tunnelvision in Europe, and he pointed to better yields on corporate and government bonds in countries like the United States and Australia. There, yields are still positive.
Per Gregory: “There are likely to be better opportunities in other markets.”
