In an article from De Telegraaf, Professor of Financial Markets at Erasmus School of Economics Mary Pieterse-Bloem explains how even junk bonds are sold with negative interest rates.
Even Pieterse-Bloem, a seasoned professional in the field of financial markets, is astonished by the current situation concerning so-called junk bonds. These are bonds which historically were only sold against the promise of a high return, due to their very bad ratings. However, now these bonds are sold against negative rates: you have to pay money to invest in them.
Active central banks
The explanation lies with the central banks, according to Pieterse-Bloem. Because central banks have entered the market of company bonds as well, virtually all risk disappeared, meaning that the reward for buying such bonds didn’t have to be as high as before. Pieterse-Bloem: ‘Because they have started buying low-valued debt of companies as well, investors think: even though a junk bond may bring along more risk, it does come with an enormously strong safety net that central banks have made. They will always save us. And the number of bankruptcies of companies is still extremely low – thanks to this support. It is exactly this what leads to negative interest rates’.
Because everyone is investing in junk bonds, money doesn’t flow towards other causes that may have very positive effects, Pieterse-Bloem mentions. ‘The effect [of the worst companies refinancing themselves] is that all this money doesn’t get invested in smart technologies of start-ups that would be able to make a big leap forward in the field of big data or artificial intelligence. This is killing innovation, and bad for our economy’.