Negative Time Preference or Bond Crack-up Boom
Bloomberg reports an astonishing bit of interest rate news from France. Mark Gilbert reports,
French utility Veolia Environnement SA is one of a handful of low-rated borrowers—assessed at BBB or lower by Standard & Poor's—with fixed-rate debt repayable in three years or longer that trades at yields below zero in euros.
Fleckenstein Capital LLC put it this way,
yesterday a Parisian BBB-rated company (i.e., quasi junk) issued $500 million in three-year notes yielding -0.026%.
We have been peppered with so many absurdities, nothing seems absurd anymore, although you can be sure when folks look back at this period, they will wonder, "What were they thinking?" and the list of examples will be quite long.
One wonders how this could be. As Guido Hülsmann concluded in his QJAE article “The Theory of Interest,” that an acting man earns money interest when his “originary interest causes a positive spread between the money proceeds from selling his product and the money expenditure on the related factors of production.”
Time preference is paramount in Austrian theory and Hülsmann quotes Böhm-Bawerk, “Present goods have in general greater subjective value than future goods of equal quantity and quality.”
Professor Hülsmann emphasizes Böhm-Bawerk’s qualifying words, “in general.” Böhm-Bawerk didn’t assert that time-preference was always positive, unlike latter Austrians who followed Ludwig von Mises--Murray Rothbard, Walter Block, Roger Garrison, Hans-Hermann Hoppe, and Jeffrey Herbener.
acting man does not appraise time periods merely with regard to their dimension. His choices regarding the removal of future uneasiness are directed by the categories sooner and later. . . . Satisfaction of a want in the nearer future is, other things being equal, preferred to that in the farther distant future. Present goods are more valuable than future goods.
Time preference is a categorical requisite of human action. No mode of action can be thought of in which satisfaction within a nearer period of the future is not—other things being equal—preferred to that in a later period. The very act of gratifying a desire implies that gratification at the present instant is preferred to that at a later instant. He who consumes a nonperishable good instead of postponing consumption for an indefinite later moment thereby reveals a higher valuation of present satisfaction as compared with later satisfaction.
But Hülsmann points out that Irving Fisher, Frank Fetter and Israel Kirzner also believed time preference could be negative.
So we have France’s Veolia Environnement S.A.floating €500 million of debt, rated just 2 notches above junk, with a three year maturity priced to yield negative 0.026%. As Grant’s Almost Daily writes, “Even better: Investor demand for the Veolia issue was such that the offering was oversubscribed by more than 4:1. Said another way, three out of four investors who wished to lose money on a yield-to-maturity basis were left disappointed.”
Widows and orphans considering the Veolia bonds might want to consider what the analysts at S&P have to say. While they “praised the Veolia C-suite for its ‘prudent and proactive liability management’ in a June 2 report, while nevertheless noting that: ‘We assess Veolia’s risk profile as significant, given the group’s material debt.’”
It seems the only way lenders can make out with negative yielding bonds is for the world to experience massive deflation, while total central bank assets have climbed from $6 trillion in 2008 to $20 trillion in less than a decade with no end in sight.
Mario Draghi contends central bank-imposed negative interest rates and an indiscriminate bid under corporate bonds will help “the quality of loans.” Grant’s has its doubts. “For now, potential issuers of all stripes are able to finance themselves for virtually nothing. But a crack has recently appeared in the façade: Amidst the modest selloff in U.S. high yield seen recently, the yield on that Bloomberg Barclays Pan-European High Yield Index jumped to a four month high of 2.88% on Wednesday from 2.19%, a 10 year low, recorded less than two weeks prior.”
Is this really negative time preference or a central bank induced crack-up bond boom?