Apple just proved that the zero lower bound still exists


Can companies be paid to borrow money? It’s theoretically possible — but it hasn’t happened yet. And the example of Apple in Switzerland suggests that it’s not likely to happen any time soon.

A couple of weeks ago, I got into a couple of Twitter fights about a meme which was gaining momentum in the econoblogosphere: that Nestlé was “getting paid to borrow money”, in the words of a Washington Post headline.

The source of the meme was the fact that one of Nestlé’s bonds, denominated in euros and maturing in 2016, had briefly traded at a negative yield. Does this mean that Nestlé was being paid to borrow money? No. A company has to pay to borrow money if it ends up paying back more money than it borrowed. And that’s exactly what Nestlé is going to have to do with this bond.

When Nestlé’s bond was issued, in 2012, it came to market at a price of 99.89 cents on the dollar, and with a coupon of 0.75%. What that means in English is that Nestlé ended up receiving €499.45 million in proceeds, and needs to pay back €3.75 million per year in interest, for four years, plus €500 million in principal, for a total of €515 million in proceeds to bondholders. In total, then, Nestlé is paying bondholders €15.55 million more than it borrowed from them.

When people talk about negative rates on bonds, then, they’re not saying (or at least they shouldn’t be saying) that the companies which issued the bonds are being paid to borrow money. Instead, they’re saying that investors are trading these bonds to each other at negative rates: anybody buying Nestlé’s bond at these levels is guaranteed to lose money if she holds it to maturity. (Alternatively, of course, she can just flip it to a greater fool and make money that way.)

But here’s where things get weird. A bond trader shouldn’t care whether she’s buying bonds from another trader, or buying bonds directly from the issuer. So, if bond investors can sell corporate bonds at negative rates, shouldn’t companies be able to do so as well? Isn’t the yield on corporate bonds a very good indication of where those companies can issue new debt?

The thing is, it’s never as easy as that. A company which is close to default will still have bonds outstanding, but won’t be able to borrow more money, at any price. And, once you pass what’s known as the “zero lower bound”, something similar happens. In theory, companies should be able to borrow at negative rates. But in practice, they don’t.

We’ve just seen a prime example of the zero lower bound in action — even in a country, Switzerland, where rates have been negative for quite some time. (The Swiss National Bank has set its benchmark overnight interest rate at 0.75%, and government bonds have negative yields going all the way out to 10 years.) When rates are that low, opportunistic companies love to lock them in — and they certainly love the idea of being paid to borrow money. But even Apple doesn’t seem to be able to actually borrow at a negative interest rate.

Apple borrowed 1.25 billion Swiss francs this week, by issuing two different bonds — but one of them was an eight-year bond with a yield of 0.281%, while the other is a 15-year bond with a yield of 0.74%. The yields on both bonds are very, very low — but the yield on neither bond was actually negative. Similarly, recent Swiss bond issues from healthcare company Novartis and utility Swissgrid have also come at relatively long maturities and marginally positive yields.

There’s a pattern here: companies are pushing out the maturity of their new bonds until the yield becomes positive, and then they issue. Yields generally go up as the tenor of a bond increases — and rather than attempting to issue a short-dated bond (like Nestlé’s 2016 issue) at a negative rate, the companies instead do something much more normal, which is issue a longer-dated bond at a positive rate.

Being able to issue debt at a negative interest rate would be a massive PR coup for any company which did it, so I suspect that the reason these companies don’t do it is that they can’t do it. Bond investors might trade bonds between each other at such rates, but they’re not going to subscribe to a brand-new bond issue with a minus sign in front of the yield. This is the zero lower bound in action: it’s a weirdly important barrier. Financially speaking, the difference between a 0.1% yield and a -0.1% yield is exactly the same as the difference between a 1.9% yield and a 2.1% yield. But psychologically speaking, it’s a very tough nut indeed.

If central banks continue to set interest rates below zero, and if they lower them from modestly negative to substantially negative (-2%, say), then at some point companies will surely start borrowing at negative yields. But there’s no particular reason to believe that’s going to happen. The Fed, for instance, stopped cutting rates once it reached zero, even though it wanted much more easing. Partly, that’s because of the very real danger that negative rates could end up causing more harm than good. But partly, it’s thanks to the deep psychological problem that we have with the idea.

(Here’s an example of how the psychology plays out in practice. If you pay a monthly fee on your checking account, you are probably getting negative rates on your money right now. You’re lending your money to the bank, which ends up giving you back less money than you started with. But because the negative interest rates are presented as a fee, rather than an actual negative rate, the banks are able to get away with it.)

For the time being, then, it seems that the zero lower bound really does exist, in terms of the corporate bond markets. Yields can go below zero in the secondary market, but companies can’t actually borrow at those levels. With the world getting increasingly accustomed to negative rates, and with governments already borrowing at negative rates, it might yet happen. But that said, I’d be shocked if anybody ever managed to borrow at negative rates when swapped into dollars. That would be downright un-American.