Fixed Income Roundup: Negative Nominal Yields, Perpetual Bonds, and Corporate Checking

An economic crisis that is equal parts excess debt, weak bank balance sheets, recessionary economy, and high unemployment ensured that Spain, Europe’s fifth, and the world’s twelfth largest economy (source: OECD), was front and center for investors for the entire preceding month. No day went by without some new wrinkle that needed rapid smoothing. In fact, Spain and Greece competed for the title of Most Important Story. Fixed-income instruments, Eurobonds, were proposed as a cure for the common sovereign debt cold.

But it would be a mistake to overemphasize Spain as the fixed-income universe had many other noteworthy stories, too. Among them were:

• How Low Can Bond Yields Go? A recurring theme in 2012 and a story I am certain will continue to push past the bounds of good (bond investors') taste. Germany priced a Schatz (two-year bond) with a negative nominal yield. Wow! But then so did Switzerland. Double wow! This story pushed us within CFA Institute to ask the question: How low can negative nominal yields go? Given the “to the breaking point” anxiety of investors, it seems likely that yields will continue to take a back seat to principal going forward.
• Talk of and Issuance of Perpetual Bonds. Slowly the stark boundaries drawn between equities, preferred stocks, and bonds are disappearing as 2012 has also seen a number of bond issuers talk of extending out maturities beyond 30 years, and even to perpetuity. In Singapore some issuers are even pricing (gasp!) perpetual bonds.
• Ratings, Schmatings. The blood letting from credit ratings agencies that began in the Great Recession continues as twenty of Europe’s banks met to discuss ways of circumventing the financial instruments opinion makers.
• BRICS Need Pointing and Tucking, Too. India became the latest of the Brazil, Russia, India, China, South Africa (BRICS) confab to have its sovereign credit rating either lowered or put on ratings watch. Investor expectations for these nations have bordered on manic for many years, with talk frequently sounding just like the latest gold rush. Have we learned nothing?
• China Deepening Credit Markets. China continued its efforts at creating a mature economy by stating its intention to allow smaller companies to begin issuing their own private placement debt starting in June. China’s impending leadership change in the fall is leading to many subtle policy shifts.
• Upholding the Meaning of the Word "Collateral." In a little-noticed but very important story the U.S. Supreme Court upheld credit bidding. Credit bidding allows creditors in a bankruptcy to seize control of assets (i.e., collateral) if the bids for those assets in a disposition are less than they feel is warranted. Essentially, the court upheld the meaning of the word collateral — a good thing.
• Corporate Treasuries Become Banks. In what I felt was the most fascinating story of the preceding month, U.S. corporations have started offering a product similar to checking accounts to the general public that promise higher yields than the bank variety.

For more news and trends, visit the Fixed Income Community of Practice.