CIBC sells negative-yield bonds for 1st time

Canadian Imperial Bank of Commerce has become the first Canadian bank to sell bonds with a negative yield, and it had no problem selling debt that is guaranteed to lose money if held to maturity.

Bank sells 1.25 billion euros worth of debt guaranteed to lose money in long run

CIBC, led by CEO Victor Dodig, sold its first ever negative yielding covered bonds this week. (Jeff McIntosh/Canadian Press)

Canadian Imperial Bank of Commerce has become the first Canadian bank to sell bonds with a negative yield, and it had no problem selling the debt even though buyers are guaranteed to lose money if the debt is held to maturity.

The bank raised almost $1.8 billion via a bond sale of six-year debt that yields minus 0.009 per cent. That means anyone who bought the debt paid $100.054 for the right to get $100 back from the bank in 2022.

Despite the seemingly poor return, the bank had no trouble selling the euro-denominated bonds on Monday. The bond sale was two times oversubscribed, which means there were people willing to buy twice as much debt as there was debt available for sale.

Going negative

The bond sale makes CIBC the first Canadian bank to dip into a current appetite for negative-yielding bonds. But the lender is far from the only one to be selling investments guaranteed to lose money.

According to Bloomberg data, there is almost $12 trillion US worth of negative-yielding debt in the world now, much of which has come from governments and central banks that have cut their interest rates to record lows in order to stimulate the economy.

"Low yields may be great for governments, but they are lousy for savers and investors," Hilltop Securities managing director Mark Grant said in a note.

Investors have an appetite for such debt because the forecast for other assets is even worse. With stock returns looking dodgy due to fears about the global economy, lending money to a bank can seem appealing even if it's guaranteed to lose a few pennies per dollar over time.

"As expected returns on 'safe' assets have diminished, investors have been forced up the 'risk curve' to obtain satisfactory returns," Scotiabank said in a recent note to clients. "The search for yield will only become more desperate."

The CIBC bonds are doubly appealing, because they are what's known as covered bonds. That means they are backed by Canadian mortgages, so investors in the bonds have the right, theoretically, make a claim against those mortgages in the unlikely event the bank ever defaults on its loans. That gives investors two layers of protection, both in the bank's creditworthiness, and from that of the underlying assets — the mortgages themselves.

The bonds have yet to be rated by an agency, but they are expected to get a pristine AAA rating for safety and creditworthiness, according to Bloomberg.