The ballooning volumes of negative-yielding debt turning the global bond market on its head poses a conundrum for corporate treasurers. With significant volume of bonds flashing red for investors, is cheap financing too tempting to ignore or are the risks of chasing yield in a distorting market outweighing funding benefits?
While largely uncharted waters, a balanced strategy is key to optimizing cost of capital without jeopardizing stability. This requires treading a fine line between capitalizing on plunging issuance costs and retaining flexibility to adapt to market swings.
Restructure and Refinance – Selectively
The natural temptation in an inverted yield environment is pursuing refinancing or duration extension to lock in savings from rock bottom rates. The plunge in bond yields into upside-down territory almost seems like free money for creditworthy issuers.
However, aggressively reconfiguring debt profiles purely to maximize negativity, without holistically assessing broader exposures and vulnerabilities, is fraught with hidden risks. For one, unconditionally extending durations or mass refinancing into lengthy 30Y bonds to eke out fractional yield gains leaves companies exposed to serious repricing threats from any normalization trigger down the line.
If growth or inflation recoveries prompt central banks to rapidly raise rates, the losses on long bonds from yield spikes could easily erase years of tiny negative rate savings. Additionally, companies lose flexibility in redirecting capital deployment with over 50% of debt locked into fixed low coupons for decades rather than adjusting to evolving business needs.
Smart Tailoring Over Broad Restructuring
This is not to say companies should completely ignore cheaper issuance costs amid negative yields. But rather than one-size-fits all duration extension, large scale refinancing, or moving entirely to bonds from loans, the path forward demands nuance.
Astute corporate treasurers are selectively targeting specific portions of debt tied to long-term cash generating assets and swapping out shorter bonds for longer tenors only in those synced cases. This allows capturing negativity in a matched manner without overexposing the entire debt portfolio to rate risks.
For instance, infrastructure project finance loans can prudently shift to 30Y bonds mirroring underlying concession lengths, locking in long run savings. Similarly, strategically timed issuances in 10-20Y part of the curve backed by secular growth business cash flows like cloud or networks manage negativity without jeopardizing flexibility.
Rewrite Recipe with Multiple Ingredients
Rather than relying excessively on widely available negative yield bonds, diversifying funding sources offers alternate levers to optimize overall pricing mix. Given vanishing credit spreads, high grade issuers can find value in currently elevated short-term instruments like commercial paper.
This is complemented by exploring niche pockets of positivity persisting in private credit markets. Private placements and middle market direct lending, especially backing tangible assets, can unlock greater return potential than public bonds absent large issuance premiums.
Slice Duration Tactically
Blanket duration extension without considering portfolio level objectives carries unintended drawbacks. The loss of flexibility in adapting to rate cycle turns and unexpected inflation upticks makes for poor risk reward.
Instead, modest targeted curve stretching concentrated in 2-5 year sector coupled with laddering and callable features allows taking advantage of negative yield mispricing while retaining medium term optionality to reshape tenors.
The measured barbell approach balances extracting cost of capital savings in current negativity against retaining contingency plans to shift positioning as the extraordinary market dynamic evolves.
Hedge Bets Over Outcomes
Much uncertainty still shrouds the persistence or shifts of negative rate regimes across major currencies. This calls for sophistication in financial risk management beyond plain vanilla derivatives like interest rate swaps.
Customizing hedging structures around portfolio return objectives rather than specific rate forecasts offers a robust buffer. Options strategies across the mid-curve give treasurers payoff upside should once improbable positive rate outcomes manifest while limiting maximum losses.
In navigating the negative terrain, corporate issuers ultimately face a trade-off between lowering funding costs today and maintaining resilience against market caprices tomorrow. Get it right, and cheap money fuels strategic flexibility. Get it wrong, and ostensible savings sow risks of strategic setbacks. With open waters ahead, a diversified, adaptable and measured debt strategy serves prudent voyage.