Germany Sells First Ever Negative-Yielding 10Y Treasury, Corporate Bonds

Negative for 10 Years

Overnight, we previewed what was about to be a historic for the eurozone bond auction, when this morning Germany sold its first ever 10Y bonds with a zero coupon. As it turned out the issue was historic in another way as well: with the prevailing 10Y bond trading well in negative yield territory, it was largely expected that today’s bond auction would likewise issue at a negative yield, and that’s precisely what happened, when as the WSJ reports, Germany sold 10-year debt at a negative yield on Wednesday, “becoming the first eurozone nation to do so and setting a further milestone in the relentless fall of government bond yields around the world.”

To be fair, this was far less exciting than the media makes it out to be as primary issuance always tracks the secondary market and in the case of Bunds, these have been “sub-zero” for several weeks now.  Still, it was an accomplishment for Germany to issue debt which not only does not pay a cash coupon, but which will end up reducing Germany’s total debt by the time it matures.

While today’s 10Y auction was historic, Eurozone countries, including Germany, have sold shorter-dated bonds at a negative yield before, and Switzerland and Japan have issued 10-year bonds at yields below zero. But the 10-year bund is considered the benchmark issue in Europe, a region of sheer monetary insanity.

These yields are “symptomatic of serious structural problems with the global economy,” said Daniel Loughney, a portfolio manager at AllianceBernstein. “Clearly this poses a serious predicament for investors, as investing in [a] negative-yielding instrument is impossible to justify from a buy and hold perspective.”

Mitul Patel, head of interest rates at Henderson Global Investors, said there are concerns the ECB will run out of eligible bonds to buy in Germany, leading to speculation that the central bank will have to alter its rules to avoid running out of road. The ECB’s rules preclude it from buying any bonds with a yield lower than its deposit rate of minus 0.4%, and the central bank can buy only up to a third of each eurozone country’s debt.

Deutsche Bahn

But wait there’s more, because just hours prior to Germany selling its first ever negative-yield 10Y bund, German railway operator Deutsche Bahn became the first non-financial company to sell a corporate bond with a negative yield in euros on Tuesday: it was perhaps fitting that a corporation would frontrun a government.

The issuer was last in the market on June 30 to print a 750m 15-year deal at 26bp over mid-swaps. The deal is now bid at plus 14bp, according to Tradeweb.

As with anything debt related these days, there was humor: “I’m not sure why they’re issuing so soon, probably because they can and there is demand,” one investor who placed an order for the deal said. “Compared to its last deal today’s price at plus 15bp still looks cheap on the curve and offers some value.”

Yes, a financial professional just said a -0.006% YTM “offers value.”

There is some speculation whether Deutsche Bahn is, in fact, a corporate: after all the company is 100% state-owned, leading some to question whether it counts as being the first ‘corporate’ issuer to sell negative-yielding debt. But, as Reuters reports, Deutsche Bahn’s debt has regularly been sold to investment-grade corporate investors, with its deals managed by the corporate banking syndicate teams. So the investment-grade corp glove fits…

While other international companies such as Sanofi, Engie and Unilever – have already sold 0% coupon bond issues with barely positive yields – the German railway operator is the first one to actually do so with a negative yield at auction.