(Bloomberg) -- If you think credit markets in Europe couldn’t look more forbidding, think again.
Just look at Switzerland. Companies there entered the $16 trillion labyrinth of global negative yielding debt back in 2015. With almost all high-grade corporate bonds in Swiss francs now offering below-zero yields, the nation offers a cautionary tale for the euro zone.
The lesson: the stockpile of notes likely to impose losses for many buy-and-hold investors can expand fast -- ensnaring portfolios with interest-rate risk along the way.
“I like drawing comparisons between the Swiss market and what could happen in Europe,” said Johan Nebel, head of research at Bridport & Cie SA in Geneva. “What happened in a small country was maybe a first experiment and now could happen in a bigger market.”
Around 94% of senior Swiss franc corporate bonds have negative yields, according to data compiled by Bloomberg. Just five months ago, that amount stood closer to 50% -- a level the euro market is at today.
While the average euro high-grade yield remains positive at about 0.25%, their Swiss counterparts are trading at -0.35% after turning below zero two months ago, Bloomberg Barclays data show. That includes a Novartis AG note with almost 16 years left to maturity now quoted at 17 basis points below nothing.
German government yields are near record lows spurred by recession risk and bets on European Central Bank stimulus. Over in Switzerland, the central bank has been engaged in a decade-long battle against a strong currency despite being home to the world’s lowest interest rate. It has kept the sovereign’s entire curve and huge swathes of the senior corporate market below 0%.
Monetary moves like that are why credit trading in euros has demonstrated a striking propensity to follow the Swiss lead. A year after the first corporate in the nation turned negative in local currency, euro obligations followed suit in 2016.
The triple-A rated nation was the first to offer a sub-zero 10-year trade, courtesy of Total SA’s 200 million Swiss francs ($202 million) issue in July. It took just a month for the euro market to catch up, after the yield on Nestle SA’s 750 million notes in euros ($830 million) that mature in 2029 plunged to as low as -0.11% last week.
Read more: Nestle Brings Negative Yields to Long-Dated Euro Company Bonds
Even analysts who reckon the ECB is under less pressure to ease than the Swiss National Bank, at least from a currency standpoint, say the single-currency bloc can become more Swiss-like.
“It is uncharted territory but I don’t see any technical reason why it should not be trading more negative than it is already,” according to Dominik Meyer, head of credit research at Vontobel in Zurich, referring to company bonds in euros.
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