February 4, 2016 / 2:49 PM / 2 years ago

European corporate bond yields fall back below zero

LONDON, Feb 4 (Reuters) - Yields on bonds issued by some blue-chip firms in Europe could be headed further below zero, with the European Central Bank set to take interest rates deeper into negative territory.

Some investment-grade firms in Europe with a short maturity are already trading with slightly negative yields -- suggesting investors are willing to pay for the privilege of lending to the most trusted borrowers.

A two-year bond issued by French pharmaceutical firm Sanofi yields -0.008 percent, while an equivalent euro-denominated bond issued by British healthcare company GlaxoSmithKline yields -0.026 percent, according to Reuters data.

Research from CreditSights shows that investment grade bonds from companies including French bank Credit Agricole and German industrials conglomerate Siemens are all yielding close to zero.

ECB quantitative easing, which kicked off in March last year to boost inflation and economic activity, has turned bond markets on their head, pushing yields on German government bonds with a maturity of up to seven years below zero.

Yields on top-rated corporate issuers have dipped in out of negative territory over the last 12 months.

But a significant move below zero may be on the cards and European corporate yields could follow the same path as those on high-rated Swiss corporates, which moved into negative territory after the Swiss central bank cut rates below zero and lowered its deposit rate to -0.75 percent in January last year.

"We've seen this in Switzerland, so it is possible in Europe. It depends on how negative (ECB President Mario) Draghi takes interest rates," said Zak Summerscale, chief investment officer for European high yield at asset management firm Babson Capital Management.

According to Deutsche Bank, AA-rated Swiss corporate bond yields are negative out to a maturity of 10 years.

The ECB is tipped to cut its deposit rate by 10 basis points to minus 0.40 percent at its March meeting and money markets price in a further cut by June.

In a note this week, Deutsche Bank strategist Jim Reid said a deeper rally in European government bond markets could be a trigger for corporate bond yields to dip back below zero.

"Our central view is that zero might be a temporary resistance point if government yields rally further but that at some point the dam will break and corporates will trade on a spread basis and go sub-zero," he said. (Editing by Jeremy Gaunt)

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