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Rout in Bond Markets Is So Severe That Double-Digit Losses Are the Norm

·4 min read

(Bloomberg) -- Bonds denominated in the world’s leading currencies are suffering double-digit losses following the European Central Bank’s decision to end quantitative easing.

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Investors have now lost 10.1% this year on euro high-grade corporate bonds, Bloomberg debt indexes show. The more rate-sensitive US dollar and sterling credit markets have already been nursing double-digit negative returns in 2022.

To put the euro credit decline in perspective, its year-to-date drop eclipses all previous routs. After the Covid pandemic hit Europe in 2020, the Bloomberg Euro Aggregate Corporate Total Return index showed losses of as much as 7.3%, while negative returns peaked at 6.1% in 2008, following the collapse of Lehman Brothers.

The global pain follows a brief respite in May, when investors hoped that slowing economic growth would help ease price pressure. But inflation has been sticky and oil surged yet again, pushing the ECB to announce that it will stop adding to the world’s biggest bond-buying program this month and raise rates soon after.

It’s “the end of an era,” Soren Willemann, head of European credit strategy at Barclays Bank Plc, wrote in a note. “Even if relative value has been tilting in the favor of Europe, it is undeniable that Europe remains in the eye of the storm.”

Both investment-grade and junk bonds slumped in Asia on Friday, and along with peers in the US are on track for their first weekly loss since early May as bets increase that global monetary authorities must do more to beat down inflation.

“The Fed will be raising rates, no chance of a pause, certainly not for the next 12 months,” Michael Spencer, chief economist and head of research at Deutsche Bank AG, said in an interview on Bloomberg Television. “We’re forecasting sort of an average recession, but the risks are clearly to the downside.”

Also read: Stagflation Danger Spurs World Bank to Cut Global Growth Outlook

The selloff in bonds is having a knock-on effect in currency markets as higher Treasury yields attract more flows into the dollar.

In particular that’s put further pressure on the yield-sensitive yen, which is now a whisker away from tumbling to the lowest in 24 years. This, in turn, is boosting inflationary pressure in Japan, where the local credit market suffered a string of corporate-bond cancellations as borrowing costs rise from still ultra-low levels.

Elsewhere in credit markets:

EMEA

Media and Games Invest’s 175 million euro floating-rate note was Friday’s only addition to the weekly tally of 31.5 billion euros in Europe’s primary bond market.

  • A gauge of fragmentation in the credit market, the gap between Italian spreads versus the high-grade average, looks ripe for deterioration as the ECB’s policy tightening raised the risk of growing disparities in the euro area

    • The yield gap between 10-year Italian bonds and their German peers widened for a third day to 226 basis points, the most since May 2020

  • Corporate bond market stability could hinge on fund flows remaining stable, according to UBS

Asia

Deal flow in Asia’s dollar bond market slowed on Friday after a busy week in which issuers in sold about $6.3 billion of notes, according to data compiled by Bloomberg.

  • Hanwha Energy USA Holdings Corp. mandated for a potential green bond in the US currency

  • Chinese high-yield dollar bonds dropped 1-3 cents on the dollar Friday morning, according to credit traders

  • Dollar notes of state-backed Chinese developer Greenland Holdings Corp., which stunned investors when it proposed to delay a note repayment, are on track for a second week of gains as investors vote on the plan

Americas

Defaults are ticking higher in US private credit, and they might be rising further as inflation and climbing interest-rates bite into profits for smaller companies.

  • Investors snatched up a leveraged loan from CDK Global Inc., signaling that a series of buyout financings coming up, including $15 billion of debt for the purchase of Citrix Systems Inc., might see relatively strong demand

  • Paolo Maturo has joined AXA Investment Managers as a senior analyst for its US investment-grade bond funds

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