Two European companies -- French drugmaker Sanofi and German household products maker Henkel -- last week became the first firms to persuade investors to pay them to borrow euros. By selling bonds yielding minus 0.05 of a percentage point, they may well have signaled the bond market's peak, delivering this decade's equivalent of the "Ukrainian Chicken Farm Moment."

It was massively oversubscribed. A few weeks later, bird flu broke out in Hong Kong. The chicken farm was uninsured. The market immediately discounted the notes and the price crashed 30 percent or more. That moment of supreme belief when anything is possible in the new issues market will always be remembered as "The Ukrainian Chicken Farm Moment."

An investor who buys some of Sanofi's 1 billion euros ($1.12 billion) of bonds and holds them until they're repaid in three years is guaranteed to lose money. The same goes for owners of Henkel's 500 million euros of two-year notes. It's the equivalent of lending a dollar and five cents to your neighbor, knowing that you'll only be repaid a dollar. It's further evidence, if it were needed, that the negative interest-rate policies being pursued by policy makers, including the European Central Bank, are making areas of the financial markets look increasingly similar to conditions prior to the financial crisis of almost a decade ago. Then, as now, investors trying to boost returns in a low-yield environment loaded up on risk. Today's negative-yielding bonds are the equivalent of the highly-leveraged derivatives that were all the rage in the middle of the last decade.

David Fuller's view

These are moments which we can all look back on some time later and see that investors’ behaviour was totally irrational. 

I suspect we have seen some important lows in government 10-year bond yields this year, including for the USA which reached a low of 1.3180% in July; the UK’s 10-Yr low was 0.501% in August; German Bunds fell to a 10-Yr low of -0.205% in July; Japanese 10-Yr bottomed at -0.295% in July, and Australia saw a low at 1.811% in August, albeit from a higher low than the others and it has seen a smaller rally subsequently. 

The convergence of these lows within July and August, followed by mostly sharp rebounds is an important signal.  The pragmatic technical comment is that we have seen lows of at least near-term significance.  However, given that they also occurred at or near record lows, plus the panicky flight into government yields offering little reward, not to mention some risky corporate bond issues in search of yield, these could be very important lows for the fixed interest sector. 

Tomorrow I will discuss stock market action following my cautions last week.