Henkel and Sanofi, two European industrials, just completed successful multi-billion euro bond offerings.  Both are reported to have attracted wide interest.

What’s striking to me is that parts of both issues carry negative yields.

Henkel 

The Sanofi website has yet to be updated, but the Henkel issue looks like this:

–€500 million in two-year bonds with an annual coupon of 0.0% and a yield to maturity of -0.05% (meaning that the bond was issued slightly above par)

–€700 million in five-year bonds with a coupon of 0.0% and a yield to maturity of 0.0%

–$750 million in three-year Euromarket (meaning issued outside the US) bonds with a coupon of 1.5%, and

–£300 million in six-year bonds with a coupon of 0.875%.

How can these new issue yields be so low?  

Three reasons:

–for each category, bonds in the secondary market are already trading at these levels,

–global bond investors believe that market yields will become more negative from where they are today, generating capital gains–small ones, in all likelihood, but gains nonetheless–for today’s buyers,

–bond managers don’t really believe yields will get more negative but know that if they are holding cash they’ll be left behind in the dust by competitors who are buying issues like these.  So they hold their noses and participate.

My guess is that there’s a liberal dose of #3 in managers’ thinking.

my thoughts

First is me reminding myself that what I really know about is stocks, not bonds.

The yields for €, £ and $ tranches are all roughly in line with their respective sovereign 10-year bond yields, taking Germany as the € exemplar, yielding -0.09% (Greek ten-year eurobonds yield +8.5%, by the way).

To the degree that these are rational economic commitments, and not just driven by the fear of missing out, buyers must believe that euroland rates will remain low for an extended period of time

They think there’ll be continuing mild weakness in sterling vs. the euro.

They believe that US rate rises over the next couple of years may be significant, given that the pickup over 3-year treasuries is 60 basis points.   The same is true for sterling bonds, but I’m attributing some of that to currency fears.