At the start of March 2016, the German mortgage bank Berlin Hyp AG issued a loan for €500 million with a three-year term. The remarkable fact was that it was the first time a company had placed a new issue with a negative return. Investors thus pay -0.16% per year to hold the loan.
The low interest policy of the central banks creates false incentives. This means that investors do not receive a sufficient return for their risk. Bonds from companies with little stability yield returns of less than 4%. Normally, double this figure would be expected. The interest rate leads investors to believe that the quality is supposedly good.
Second, low financing costs make companies vulnerable. They induce result «leveraging». Shares are bought back and destroyed using cheap outside capital. As a result, the earnings per share increase without any real value added.
In the current economic climate, companies’ earnings outlooks are uncertain. Credit refinancing is likely to be difficult, even without an interest rate hike, which increases the likelihood of credit losses.
In no circumstances should investors switch to excessive credit risks or very long maturities in their search for returns.
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