Poland has joined the rest world, although the first emerging market, to sell debt at a negative yield. This move further underscores the effect of declining borrow costs in global markets. Ever since the European Central Bank launched its quantitative easing program this year, to stimulate economic growth and increase inflation in the flagging Eurozone, prices of bond prices have skyrocketed, which resulted in record low bond yields.
The Swiss Franc-dominated SFr80m ($84m) three-year bond will pay zero coupon but rather yield negative 0.213 per cent. This movement contributes to the increasing pool of negative yielding sovereign bond in Europe. By Standard & Poor’s rating, Poland’s government debt is rated six levels below Germany’s triple A. Despite the fact that a number of highly rated European governments have already sold bonds at negative yields, emerging market governments have yet to make a similar movement until this point. However, the aggressive monetary policy loosening, triggered by the quantitative easing program, has driven unprecedented demand for fixed income, and decreasing yields for riskier assets.
The European Central Bank’s decision to cut rates and initiate the QE program resulted in a steep depreciation of Euro against all of its rival currencies. This led central banks across Europe to cut interest rates. Fixed income investors have quickly gotten used to the changing reality of negative yielding government debts in Europe.
Michael Riddel, fund manager at M&G Investments, stated, “Negative yields are taboo that has long been broken. With European deposit rates at minus 0.2 per cent and the lowest yielding German bond at minus 0.28 per cent, the market is just looking for a pick-up over that.”
- Fiona Xiao