Funds were the biggest buyers of thefirst negative-yielding euro bonds sold by anon-financial company, highlighting how central bank stimulusis distorting markets.

Deutsche Bahn AG allocated 57% of the 350-million euro ($388million) bond sale to funds, while banks bought 23%, according to aperson familiar with the matter who asked not to be identifiedbecause they aren't authorized to discuss the offering. Investorsin Germany and Austria bought most of the bonds.

Investors in the state-owned German rail operator willeffectively pay to lend to the company after its bonds were sold toyield minus 0.006% on Tuesday. Yields on more than $10 trillion ofsovereign and investment-grade corporate bonds have been driven tozero or below as central bank efforts to boost their economiesinflate asset prices.

“It must feel awkward to be exposed to a credit risk andsimultaneously lock in a guaranteed loss,” said Hyung-Ja de Zeeuw,an Amsterdam-based senior credit strategist at ABN Amro Bank NV.“It's the world upside down: You issue bonds and you get money forfree. It's a result of unconventional policy.”

The average yield investors demand to hold investment-grade debtin euros has fallen to a record 0.8%, according to Bank of AmericaMerrill Lynch indexes.

Buyers are prepared to accept negative-yielding Deutsche Bahnbonds because they view them almost as secure as Germansovereign debt. Germany auctioned 10-year bonds with a negativeyield for the first time on Wednesday, with bund rates at minus0.056%.

“Investors probably consider this as effectively ahigher-yielding, albeit negative, German government bond,” saidDuncan Warwick-Champion, the London-based co-head of global creditresearch at ECM Asset Management, an investment team within WellsFargo Asset Management, which oversees more than $480 billion. “Thesupply of bonds relative to the level of demand from investors isquite limited.”

Bloomberg News

Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.