Global Central Bank Policies Pushing the Limits of Return-Free Risk

June 17, 2016

Global Central Bank Policies Pushing the Limits of Return-Free Risk Photo

The opportunity to earn return-free risk was taken to new heights last week with Toyota Finance Corporation's issuance of 3-year Yen-denominated bonds yielding 0.001%. Not surprisingly, the Toyota bond was issued with the lowest coupon ever for a Japanese company. Toyota appears pretty stingy for not offering at least one basis point of return (cumulatively!) to investors assuming three years of credit and interest rate risk.

Not to be outdone, the European Central Bank (ECB) started buying corporate bonds last week as part of its quantitative easing program (after adding public-sector bonds, covered bonds and asset-backed securities last year). Average yields for eurozone corporate debt as measured by Bank of America Merrill Lynch have now moved below 1%.

Adding fuel to the low-yield fire last week, investors sought safety in government bonds as odds are increasing of a “yes” vote for Brexit. 10-year German government bonds appear ready to cross over into negative yield territory, joining 10-year Swiss and Japanese debt.

This week's chart highlights how much the borrowing costs for the highest rated corporations have declined across the globe during the past 10 years.

Key Takeaway:

Fixed income investors are beginning to question just how far global central banks can push with negative interest rate policies (NIRP). Falling under the category of unintended consequences of unprecedented monetary policies, Germany's Commerzbank is considering moving billions of Euros into vaults rather than facing a -0.40% deposit rate with the ECB. At a minimum, investors should prepare for more volatility as central banks send interest rates into uncharted territory.

Tags: Chart of the Week | Corporate bonds | European Central Bank | Eurozone | Negative rates

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High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.

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