When Prince William and Kate Middleton tied the knot at Westminster Abbey, they did so standing on red carpet made by Victoria. Last month, the carpet maker managed to get bond investors to the altar as well.
The UK-based company had tried to tap the bond market late last year, but the deal collapsed amid concerns over its financial health. But in July the company issued a €330 million ($568.6m) five-year bond that drew more than €1 billion of orders.
The attraction was the relatively high 5.25 per cent yield that Victoria's bond offered, which helped investors swallow misgivings over its leverage. The successful debt sale — at the second time of asking — is a good example of the impact that the huge and growing pile of negative-yielding debt around the world is having on investors' psychologies.
"You look around the world and wonder what you can buy with yield these days," said Iain Stealey, a fund manager at JPMorgan Asset Management. "It's a very challenging environment."
Two decades ago, well over half of the global bond market boasted yields of at least 5 per cent, according to ICE Data Indices. The post-crisis splurge of central bank bond buying and rate cuts lowered this to under 16 per cent a decade ago, but investors could still find plenty of higher yielding debt. Today, a mere 3 per cent of the global bond market yields more than 5 per cent — the lowest share on record.
Indeed, truly high-yielding debt is now almost an endangered species. Bonds with yields of more than 10 per cent amount to just 0.4 per cent of the global fixed income universe, according to ICE.
Negative interest rates in Japan and the eurozone, and mounting expectations that the US Federal Reserve will follow last month's rate cut with several more this year, have expanded the pool of bonds with sub-zero yields to more than US$16 trillion ($24.8t) — or around 27 per cent of the global bond market.
This is primarily a European phenomenon. While US bonds account for just under half the US$55t global investment-grade bond market, they pay out 88 per cent of all yield, according to Bank of America. That helps explain how Houston's Occidental Petroleum attracted a US$78b-plus order book for a recent jumbo bond sale. Yet with the Fed also cutting rates, one of the few remaining islands of yield could also be swamped.
"There is definitely yield scarcity in markets, and it is likely to worsen given that central banks are turning more accommodative," said Kristina Hooper, chief global market strategist at Invesco.
There are, broadly speaking, two main ways for investors to counteract the global yield drought: buying longer maturity or riskier debt. But hunger for long-term bonds from investors such as pension funds and insurers means that the yield pick-up one would normally expect to receive through buying bonds maturing decades into the future, has also fallen sharply.
That leaves many investors pushed towards the only other option: venturing into the riskier corners of the bond market, such as fragile countries, heavily indebted companies and exotic, financially engineered instruments. These are securities they would normally shun — or at least demand a much higher return to buy.
This could lead to big problems, Howard Marks, the founder of Oaktree Capital, noted in his latest memo to investors. "Low rates can lead to investment in undeserving companies and shaky securities, encourage the use of excessive leverage and create asset bubbles that eventually . . . burst," he said. "Ultimately, investors' tendency to reach for yield and assume excessive risk can introduce risk to overall financial stability."
Benin and Uzbekistan pulled off maiden international bond sales. In a sign of the times, Benin made its debut in euros rather than the US dollar more typical of emerging economies.
While the country's currency, the west African CFA franc, is pegged to the euro, the choice reflects how ravenous European investors are for higher yielding debt at a time when returns from eurozone bonds have evaporated.
Even though US dollar-denominated emerging market bond issuance has reached US$355b this year, according to Dealogic data, the current pace means it will probably fall short of the record issuance of 2017. In contrast, euro-denominated EM issuance looks set to smash the previous high with months to spare.
Nonetheless, JPMorgan's Stealey points out that most investors are showing signs of caution despite their thirst for yield.
For example, the average yield of triple-C rated bonds — the lowest rung possible without being in default — has declined only slightly to about 12 per cent this year, lagging behind the rest of the junk bond market. Sirius Minerals, a struggling UK miner, recently had to pull a bond sale, despite trying to tempt investors with a juicy double-digit yield.
"In a frenzied grab for yield you'd see triple-C do best," he said. "There still seems to be this realisation that the global economy is in the late part of the cycle."
Written by: Robin Wigglesworth
© Financial Times