Imagine tearing open an envelope while sorting through junk mail. It’s from a bank. They’d like to refinance your mortgage. But this isn’t just any deal. No, this fine financial institution wants to give you a loan with a 0 percent interest rate. Better yet, you don’t even have to pay back all the money. They’ll hand you $500,000 or so, and you’ll only have to return $490,000 when everything is said and done. In other words, they want to pay you to borrow their funds. Sounds too good to be true, right? Like, at that point you toss the brochure in the kitchen trash because, ha, that’s gotta be a scam.
And yet: This is pretty much the exact deal investors are offering some of the world’s largest companies. As the Wall Street Journal reports, the boring-but-dependable German consumer-products conglomerate Henkel AG and the French pharma giant Sanofi have both recently sold bonds at negative yields—which is to say, buyers who hold them to maturity will get back less than they paid. In other words, investors are paying to lend these corporations dough.
“We’re trying to get our heads around it,” Edward Farley, head of European corporate bonds at PGIM Fixed Income, told the WSJ. “It seems pretty bizarre to ask a corporate to look after your money and give you back less in two to three years’ time.”
The counterintuitive spectacle of lenders paying borrowers has become more common in the past couple of years thanks to pervasively low interest rates, which have been driven to rock bottom levels by the uncertain world economy and central bank interventions. Countries including Germany, Japan, and Switzerland have all sold bonds with negative yields. But it’s a sign of just how strange things have become in the debt markets that companies are pulling off the trick, too. After all, major developed nations are pretty much the ultimate low-risk borrowers because they can either print money or tax it. Corporations can’t do that. And yet investors are so starved for reliable places to park their euros that they’re willing to treat them similarly. Aside from Sanofi and Henkel, the negative-yield club also includes names like BP and BMW.
This is all also an illustration of the frustrating bind that policymakers have found themselves in trying to revive their economies. The European Central Bank has been trying to stimulate inflation and growth through quantitative easing—buying bonds to knock down yields, making it easier for companies to borrow inexpensively and pushing investors to plunk their money into things other than safe government debt. To some extent, the fact that Sanofi or BMW can borrow for less than nothing is a sign that policy is working. Money is cheap! But at the same time, the fact that interest rates remain this low suggests investors are still worried about the future, and don’t expect growth or inflation to pick up much. Meanwhile, it’s not clear that companies are really doing anything productive with all this cash. As the WSJ notes, “while companies are raising more money, analysts believe they are sitting on much of it or using it to refinance more expensive debt.” Helping corporations borrow for zilch isn’t enough to jump-start the economy. Companies also need to spend.