Money for Nothing: Negative Yields

I’ve written a fair amount about negative yields in Europe (click here or here for a refresher), but the Swiss government crossed a new threshold yesterday by actually issuing bonds with a negative yield.


Previously, bonds that were already trading in the secondary market had reached such high prices that they had a negative yield, but that’s quite different than an issuance with a negative yield because it means that the issuer actually earns money when borrowing money.


Let’s step through what I’m talking about.  Imagine that the German government had issued a bond five years ago with a one percent coupon.  At maturity, the government will pay a price of 100 for the principal and the final coupon rate. 


Now fast forward to today and recognize that there is one year left on that bond.  If an investor is willing to pay 102 for the bond that they know they will only get one more coupon for €1, then the yield is negative because they will have paid 102 and will only receive 101. 


What happened in Switzerland is different because, unlike what happened in that German bond example, the Swiss government will actually be paid interest to borrow money, which is really bizarre. 


We were talking about it today on the desk and Ryan Craft was wondering whether the bonds actually had negative coupon rates, which would mean that investors would have to send in payments once a year, or whether it was a zero coupon bond that was issued at a price over the par amount and would only receive par at maturity.  Despite some sleuthing, I couldn’t find the answer.


Last night, I read that several US companies including Warren Buffett’s Berkshire Hathaway and Coca-Cola (where he’s only a director) are now going to borrow billions of dollars in Swiss denominated bonds. 


It’s so peculiar because, normally, when you analyze a company like Coca-Cola, you want to make sure that they are profitable enough to make all of their interest payments.  If the company is now paid to borrow money, you don’t have to worry at all about how much debt they take on – the more the better! 


I suppose it’s possible that a big company could borrow so much money that they could lose money on their operative business.  What if Coca-Cola borrowed so much money that they could afford to sell cans of Coke for a dime like in the old days?  They could soak up market share, lose money doing it but still break even because they’re borrowing so much money. 


It remains to be seen whether a corporation will really be able to issue bonds with a negative coupon.  Some bonds in Nestle and Shell have traded at negative yields, but that affected the buyers and sellers in the secondary markets, not the companies that issued the bonds.


At this point, negative interest rates are acting like a voluntary tax.  It’s a tax in that the citizens are paying the government, but it’s voluntary in that the investors don’t have to buy the bonds.


I’m still hopeful that I can find a bank to issue me a mortgage with a negative interest rate.  I was so pleased to get a loan at 3.25 percent, but now I feel like banks should pay me to borrow the money.  I know that’s crazy, but in this interest rate environment, I feel like anything can happen.