Negative Yields Are Back With Investors Chasing AI Exposure
(Bloomberg) — The hype around artificial intelligence has revived a market oddity that many presumed dead with the global rise in interest rates: investors are once again paying for the privilege of owning certain bonds.
Yields on debt issued by a raft of firms in the semiconductor and microchip sectors, including Hynix and Camtek Ltd, have dropped below zero in recent weeks as money managers clamor to gain exposure to a rally that’s driven the S&P 500 to a record high this year. All of the bonds in question are convertible, meaning the holder can swap them for equity on maturity at a specified conversion price.
“It’s a hot sector for sure and there is a lot of demand for companies that are direct beneficiaries,” said Makeem Asif, a money manager at Jupiter Asset Management, who bought convertible bonds of chipmaker Super Micro Computer Inc., which were sold with zero coupon last month. The notes have rallied since they were issued and now have a yield of around -2.75%, according to CBBT pricing compiled by Bloomberg.
For investors betting that the rally in AI stocks has further to run, buying a bond that is likely to turn into equity is a no-brainer. But recent history shows the strategy comes with risks, particularly if money managers don’t have the safety net of a coupon to fall back on.
Hype around the tech sector during the pandemic pushed yields on convertible bonds of firms like Peloton Interactive Inc, Just Eat Takeaway.com and Snap Inc. below zero and allowed many to issue debt with no coupon. Many of those bonds are now in so-called “busted” territory, meaning they are highly unlikely to ever convert into shares because the gulf between the share price and the conversion price is too big.
Peloton’s convertible bond, for example, has a conversion price of $239.2344, while its shares are currently trading at around $4.27. Investors will still get their principal back when the bond matures, but many bought in hoping to be able to convert to equity.
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Super Micro Computer’s stock has already surged 1,000% in the past year and is set to be added to the S&P 500 Index later this month. The conversion price on the bond is just over $1341, a 41% premium over the current share price of $1090.
Another company that has witnessed a surge in investor interest this year is BE Semiconductor Industries, also known as Besi, a Dutch firm that’s seen as an AI proxy because companies use its hybrid bonding tools for high-performance computing and AI-related applications. Investors are “getting so excited” about Besi because they are “looking at orders and new customers for its hybrid bonding tools,” said Florian Sager, a technology analyst at Stifel Europe Bank. They see those things as long-term growth drivers for the company, he added.
The yield on Besi’s convertible bond maturing in April 2029 has plunged to -7.5% because the current share price of €166.8 ($127) is already well above the conversion price of €115.5.
For companies working in the fast-growing AI sector, convertible bonds with zero coupons provide an easy source of capital for investment, according to Pierre-Henri de Monts de Savasse, a convertible bond portfolio manager with RBC Bluebay. That means “we could see more zero coupon bonds,” he said.
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