Nestle has become the first European company with long-term debt that yields less than zero. Novartis and Shell aren't far behind. At the latest market price, the Swiss food group's 2016 bonds are on sale for a yield of -0.03 per cent. As negative yields spread through corporate debt, the theory behind the practice will face a major test. The preliminary signs are not encouraging.
European government bond markets are getting used to the phenomenon, as some euro 2 trillion of debt are in sub-zero territory, according to RBS. Central banks have engineered the minus signs in a desire to encourage the spending of idle cash or, in the case of the Swiss National Bank, to discourage foreigners from buying their currency.
Inexpensive borrowing is supposed to lead companies to invest and hire more. Funds that cost almost or less than nothing should be particularly attractive. However, companies do not have to use the largesse as monetary economists think they should. The more-than-free funds could be used to build up leverage, to buy other firms and then fire workers, or just to enrich shareholders.
While negative rates are new, ultra-low rates on corporate debt have been around for years. As yet, there's scant evidence they are working as planned. Standard & Poor's expects western European companies will shrink capital expenditure by 1 per cent this year and next.
The less desired effects are more apparent. The least risky European companies are borrowing more than at any time in the last 10 years outside of recession, according to Citigroup. Mergers and acquisitions activity rose 46 per cent globally last year, and by 55 per cent in Europe.
Yet, as confidence is low, companies are not yet going wild. Issuing debt to pay dividends is still rare in Europe. Mergers and acquisitions are 45 per cent below their 2007 peak in Europe. And the 42 basis points of spread that investment-grade companies have to pay for each turn of leverage (as a proportion of Ebitda), may now be below the historic average, but it is still twice the lowest level in 2007, according to Morgan Stanley.
If negative yields increase investors' thirst for higher income, the premium for risk will shrink. Dangerous financial exuberance is a real possibility. Economy-boosting corporate activity looks much less certain.
European government bond markets are getting used to the phenomenon, as some euro 2 trillion of debt are in sub-zero territory, according to RBS. Central banks have engineered the minus signs in a desire to encourage the spending of idle cash or, in the case of the Swiss National Bank, to discourage foreigners from buying their currency.
Inexpensive borrowing is supposed to lead companies to invest and hire more. Funds that cost almost or less than nothing should be particularly attractive. However, companies do not have to use the largesse as monetary economists think they should. The more-than-free funds could be used to build up leverage, to buy other firms and then fire workers, or just to enrich shareholders.
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The less desired effects are more apparent. The least risky European companies are borrowing more than at any time in the last 10 years outside of recession, according to Citigroup. Mergers and acquisitions activity rose 46 per cent globally last year, and by 55 per cent in Europe.
Yet, as confidence is low, companies are not yet going wild. Issuing debt to pay dividends is still rare in Europe. Mergers and acquisitions are 45 per cent below their 2007 peak in Europe. And the 42 basis points of spread that investment-grade companies have to pay for each turn of leverage (as a proportion of Ebitda), may now be below the historic average, but it is still twice the lowest level in 2007, according to Morgan Stanley.
If negative yields increase investors' thirst for higher income, the premium for risk will shrink. Dangerous financial exuberance is a real possibility. Economy-boosting corporate activity looks much less certain.