Swiss, Mexican Bond Deals Represent Milestones for Debt

Switzerland is first with 10-year bond at negative yield as Mexico lines up 100-year euro bond

 The Wall Street Journal

By EMESE BARTHA in Frankfurt, CHIARA ALBANESE in London and ANTHONY HARRUP in Mexico City

Updated April 8, 2015 9:10 p.m. ET

62 COMMENTS

Until Wednesday, no country had ever sold 10-year debt that gives investors a yield of below 0%. And no country had ever issued a 100-year bond denominated in euros.

But in the latest stark sign of how easy the era of easy money has become, Switzerland on Wednesday sold 10-year bonds that investors are actually paying to hold, while Mexico lined up a rare transaction to borrow euros it promised to repay a century from now—at a yield of 4.2%.

The two extraordinary milestones reflect Europe’s extraordinary environment.

Even as the U.S. Federal Reserve prepares to raise interest rates, the European Central Bank is forcefully driving them down. The Swiss National Bank, eager to keep its currency from soaring too far above its eurozone neighbors’, has itself shoved interest rates below zero.

The consequence is a strange collection of monetary phenomena: The ECB has begun charging commercial banks to keep money on deposit. Denmark’s central bank has furiously printed kroner to mitigate a flood of capital into the country. Even Spain, which once looked on the cusp of fiscal collapse, is able to sell short-term Treasury bills that give investors back less principal than they started with.

These plummeting yields—which mean higher bond prices—have delivered bumper returns for existing bondholders. And they have led to exceptionally cheap deals for borrowers. Also winning from the stimulus are stock investors: Most European indexes have rallied this year, and some are at or near record highs.

But the Swiss and Mexican deals push boundaries of yield and maturity even further. Several European countries inside and outside the eurozone have sold government debt with maturities of up to five years at negative yields, which means investors effectively pay for the privilege of holding it. They could profit if they sell the bonds at even higher prices.

Switzerland sold a total of 377.9 million Swiss francs (about $391 million) of bonds maturing in 2025 and 2049. On the 10-year slice, the yield was minus 0.055%, compared with 0.011% on its most recent similar bond two months ago. In the secondary market, the prices of Swiss bonds maturing up to 11 years in the future have risen so much that their yields have tipped into negative territory.

In January, Switzerland’s central bank, worried about the consequences of buying huge volumes of euros to keep the franc suppressed, scrapped its upper limit on the franc and cut deposit rates to minus 0.75%. Foreign-exchange markets were thrown into turmoil. Given that putting cash on deposit costs money, the very modestly negative yield of the new 10-year bond is marginally attractive. A similar story is playing out in the eurozone, where the ECB has set its deposit rate at minus 0.2% and aggressively bought bonds.

“The combination of deflationary fears and aggressive central-bank action has caused investors to accept the reality of negative-yield bonds,” said Jeffrey Sica, chief investment officer of U.S.-based Circle Squared Alternative Investments. An auction with a negative yield “signals a lack of confidence from investors that the economy will be growing in the short term.”

Mexico’s bond was launched at €1.5 billion ($1.62 billion) with a yield of 4.2%. It matures in 2115. Mexico has been a frequent borrower in both dollars and euros, and has issued 100-year bonds before in sterling and dollars.

The Mexico deal shows how attractive a market Europe has become for borrowers around the world: No bond of any maturity issued by a major eurozone government, except for troubled Greece, yields anywhere near 4%. One of the longest-dated eurozone government bonds, an Austrian bond that matures in 2062, yields just under 1%

Mexico’s interest in selling the bond at 100 years was partly to extend the maturity of its debt stock, but also to expand its presence in the euro bond market, said Alejandro Díaz de León, head of public credit at the Mexican Finance Ministry. “By placing debt at an exceptionally long maturity, it helps to consolidate Mexico as a widely accepted issuer,” he said.

Invesco, which bought some of the Mexican bonds, has been positive on the country’s outlook for the past year or two, said Sean Newman, a senior portfolio manager on Invesco’s emerging-markets debt team, which manages more than $1.8 billion in fixed-income assets.

Mexico’s solid manufacturing sector, particularly the auto industry, could be further supported by the U.S. recovery, and the government’s reaction to cut spending in response to lower oil prices, are among reasons for favoring Mexico despite some risks in areas such as security.

“On an aggregate level we are upbeat on the Mexico story,” Mr. Newman said.

A 100-year bond also is potentially attractive to insurance companies and pension funds, which have long-term liabilities they often like to match with long-term assets, said Win Thin, global head of emerging markets strategy at Brown Brothers Harriman.

There are other risks, however: Mr. Thin noted the value of a very long-dated bond is highly sensitive to changes in interest rates. If, at some point between now and the 22nd century, eurozone rates rise sufficiently, bondholders looking to sell could face losses.

The sale wrapped up Mexico’s foreign capital-market financing needs for 2015, and comes as the government moves to reduce spending this year and next because of lower oil prices and expectations of tougher financing conditions in the future—particularly when the Fed begins raising interest rates.

Jim Esposito, co-head of global financing at Goldman Sachs, who worked on the deal, said demand was “driven by European money managers” but also saw some U.S. buyers.

“Seeing Mexico make such a big splash in Europe is illustrative of the interconnectedness of the global capital markets,” Mr. Esposito said.

Borrowers from around the world, including big names such as Berkshire Hathaway Inc. and Coca-Cola Co., have been drawn to the allure of cheap funding in euros this year. Local borrowers also have feasted on the cheapest-ever deals. French utility GDF Suez SA issued bonds in March with no guaranteed regular payments to investors at all.

“Given the prospect of sustained monetary policy easing by the ECB for the foreseeable future, issuing long-term paper denominated in euros makes sense from a borrower’s perspective,” said Salman Ahmed, global fixed-income strategist at Lombard Odier Investment Managers. “We expect this trend to strengthen.”

Write to Emese Bartha at emese.bartha@wsj.com and Chiara Albanese at chiara.albanese@wsj.com