ECB Concerned About Effects of Ultra Low Rates

The European Central Bank is starting to price itself out of the corporate-bond market as yields plumb such lows that some notes are no longer eligible for its purchase program.

ECB President Mario Draghi’s unprecedented buying of corporate debt has sent borrowing costs tumbling to a record and now yields on some securities are so low they fall outside the ECB’s own criteria. Yields on bonds from Paris’s public transport network have already dropped below the threshold of minus 0.4%, while those from Siemens AG, Europe’s biggest engineering company, France’s train operator SNCF and Sagess, which manages the nation’s strategic oil reserves, are also approaching the cut-off point, Bloomberg reported.

The increasingly negative yields are raising questions about how much more the ECB can do in credit markets to stimulate growth. Yields on €2.6 trillion ($2.9 trillion) of government bonds in Europe have already turned negative after the central bank bought €1.3 trillion of fixed-income assets, including €32 billion of corporate bonds.

Bond Buying Tantrum

The ECB has bought an average of about €7.4 billion a month of investment-grade notes, beating estimates of a maximum of €5 billion by analysts at Commerzbank AG and Morgan Stanley before buying started.

That pushed the average yield on euro corporate bonds down to a record-low 0.59% last month, and the rate was 0.75% on Wednesday, according to Bloomberg Barclays bond index data. The dynamic has been exacerbated by investors piling into the safest securities as concern about Deutsche Bank AG’s financial health roiled market sentiment.

The notes from Regie Autonome des Transports Parisiens are quoted at a yield of minus 0.42% and yielded as little as minus 0.44% in the secondary market earlier this month, according to data compiled by Bloomberg.

Bonds from SNCF that mature in less than two years yield minus 0.38%, Bloomberg data show. The Paris-based company’s notes that were sold a year ago with a coupon of 0.05% are trading at minus 0.38%.

Investors Concerned

Negative rates are also a concern for investors, especially pension funds and insurers, which need a certain level of yield to provide the return they guarantee to policy holders. Investors are buying longer-dated and riskier securities to generate returns. Thomas Kristiansson, head of credit fixed-income at SEB Investment Management refuses to buy bonds with negative yields and tries to sell holdings whose yields drop below zero.

Negative yields have put credit investors between a rock and a hard place. Low rates may be making it harder to generate income for savers but any withdrawal of quantitative easing risks sparking a selloff in fixed-income assets.

Eurozone central bank officials are expecting the ECB to gradually wind down bond purchases before the conclusion of quantitative easing, possibly in steps of €10 billion a month, Bloomberg News reported earlier this month. European bonds fell the day after the report.

Rich Got Richer  

According to the latest report from the Danish Economic Council, a fiscal policy watchdog made up of academics commonly known as the "wise men", years of ultra low rates have benefited the rich more than the poor.

Lower interest costs have coincided with a significant rise in capital income. The wise men point out that “lower rate expenses” are one of the reasons why equity income has risen more than disposable income, thus adding to increased inequality.

In other words, Denmark’s poorest have missed out on the gains in asset prices fueled by years of cheap money. The return on Denmark’s benchmark equity index has exceeded 120% since rates first went negative in mid-2012.

Indeed, what's happening in Denmark is nothing new.  While the country is still the third most equal society in the world, according to the OECD, inequality has been rising since the 1990s.

Inequality has grown as a relatively strong economy has increased the gulf between those with jobs and those on welfare. When pension savings are excluded, data shows that incomes among the richest 10% have increased far more than those of the bottom tenth over the past quarter of a century.