Focus: Corporate debt and negative interest rates

Focus: Corporate debt and negative interest rates
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Updated 21 May 2020

Focus: Corporate debt and negative interest rates

Focus: Corporate debt and negative interest rates

What happened:

The US Senate has unanimously passed a bill calling for foreign companies to be barred from listing on US exchanges if they have not complied with the US accounting board’s audits for three consecutive years and/or are owned or controlled by a foreign government. The bill is aimed at Chinese companies and could lead to the delisting of Alibaba, Baidu and the likes. (The woes and NASDAQ delisting request of the Chinese coffee company/coffeehouse chain Luckin are not helpful in that context.)

It was noteworthy that both Republicans and Democrats supported the bill, which now has to pass the House of Representatives. The US China relationship seems to have morphed into a core theme of the US presidential election, with both the Trump and Biden campaigns trying to outdo each other in anti-Chinese rhetoric.

The dollar was caught between downward pressures driven by huge stimulus packages and the debate over negative interest rates and upward pressures fuelled by geopolitical tensions.

British pharmaceutical company AstraZeneca has received more than $1 billion from the US Biomedical Advanced Research and Development Authority (BARDA) for its research and development of a COVID-19 vaccine in conjunction with the University of Oxford.

European Purchasing Manager Index (PMI) numbers came in better than expected, but still paint a dismal picture. A PMI below 50 represents an economic contraction, whereas a number greater than 50 represents economic expansion. The euro area PMI in May came in at 28.7 for services and at 39.1 for manufacturing. In Germany the respective numbers were 31.4 and 36.8. France came in at 29.4 for services and 40.3 for manufacturing. The tendency for manufacturing indices to perform better than services PMIs reflects the fact that people are hesitant to use services while COVID-19 represents a threat. This is a trend we have seen in China, which was the first to come out of lockdown. It also indicates that economies which rely on services most may have a slower path to recovery.


The debate on negative interest rates continues: The Eurozone, Japan Switzerland and Norway are firmly in negative territory. Central banks in the UK and New Zealand are considering them reluctantly while the US Fed firmly rejects them. On one hand, negative rates are particularly challenging in countries where banks constitute the major monetary transmission mechanism, because they undermine the traditional banking business model. On the other hand, negative interest rates come in handy for highly leveraged governments and companies. There is also the argument supported by US president Donald Trump that negative interest rates help exports by lowering currency exchange rates.

We have seen companies issuing both investment grade and high yield debt. The rationale went beyond a commercial argument of refinancing debt at lower interest rates.

Both the ECB and the Fed are purchasing corporate bonds with their quantitative easing policies. The Fed has even ventured into junk bonds, if they are issued by so called fallen angels (companies that were investment grade before the pandemic). The ECB may eventually follow suit.

A key argument for companies issuing debt goes beyond the advantage of refinancing at lower rates and willing central bank buyers: Most issuers needed to shore up liquidity to get over the hump of forced lockdowns.

Where we go from here:

The German government and Lufthansa are said to be close to agreeing a €9 billion ($9.9 billion) rescue package for Lufthansa, securing the German government 25 percent of equity plus one share, giving the government a controlling minority. This may divide Europe into two camps: government -controlled airlines such as Air France/KLM and Lufthansa versus the free market airlines such as the IAG group, Ryanair and EasyJet. The latter are essentially penalised for having gone into the corona-crisis better capitalised.

US first time jobless numbers will be released later on Thursday.

China is moving to incorporate Chinese security laws into the Hong Kong’s Charter, a move which is bound to further exacerbate US–China tensions.


— Cornelia Meyer is a Ph.D.-level economist with 30 years of experience in investment banking and industry. She is chairperson and CEO of business consultancy Meyer Resources.
Twitter: @MeyerResources