Inflation risk reduces 80% of European corporate debt sold this year

(Bloomberg) – Buyers of newly issued corporate bonds are already healing their losses as inflation fears drive government bond yields higher.

About four-fifths of high-quality non-financial corporate bonds valued in Europe this year are listed below their issue price, according to data compiled by Bloomberg. As of Friday, the share of losers after the show was less than 50%.

This gloomy statistic highlights the detrimental effect on credit investors of the so-called reflation swap – bet on a rapid economic recovery and associated acceleration in inflation – which is an incentive for many to shelter from further sales of sovereign debt.

Investment grade bonds are more sensitive than high yield bonds to any threat of rising interest rates in response to inflation, a vulnerability known as “duration risk”. This is because they have a longer lifespan than their lower quality peers and have lower risk premiums. This attribute hits investors hard this year.

“Duration is already a problem when you see rate sensitive sectors underperforming and going up,” said Vincent Benguigui, portfolio manager at Federated Hermes, which oversees $ 625 billion. “Obviously, everything is stretched.”

The year-to-date total return on investment-grade euro-denominated bonds fell this week to minus 0.96% from minus 0.56% on Monday. A month ago, the return since the start of 2021 was minus 0.3%, according to the Bloomberg Barclays Indices. In contrast, the less rate sensitive junk bond market rose 2.2%.

While the threat of higher yields to offset a potential rise in inflation has been a thorn for high-profile investors throughout the year, a commitment from the European Central Bank to step up the pace of its investment program. QE Pandemic Emergency had helped funds recoup some losses previously. This week’s liquidation pushed them further into the red.

Interest rate risk is the main driver of corporate bond losses, as spreads on most of this year’s new issues are trading tighter than at launch, according to data compiled by Bloomberg. The average risk premium of high quality euro bonds relative to safer government debt is shown at 83 basis points, the lowest in more than three years, thanks to continued ECB buying and betting on economic reopening.

Click here to see the performance of the spreads of all bonds issued in Europe this year

But spreads, with little room for maneuver to tighten further, seem unable to stem the losses linked to duration.

“While the prolonged rally in fundamentals should provide another level of support, higher yields in the euro government bond space should limit the ability of the euro investment grade to attract entry and limit the potential for tightening once rates stabilize, ”wrote Cem Keltek, credit strategist at Commerzbank AG, in a note to clients on Thursday. “The pressure on rates and the weaker outlook later in the year make long-term risk-reward unattractive.”

Some hedge funds have started betting on lower corporate bond prices amid the threat of rising interest rates and strained valuation. Short positions in bad bonds are at their highest level since 2008 and bearish bets on high quality bonds are at their highest level since early 2014.

Bonds that lose value soon after issuance could potentially discourage investors from aggressively bidding for new deals.

This leaves blue-chip investors with only one realistic source of return: income earned by simply holding the interest-bearing bond, unless they are willing to move to riskier segments of the credit market.

“It’s more or less carry at this point,” said Martin Hasse, portfolio manager at MM Warburg & Co., which oversees 76.2 billion euros ($ 92 billion). “Maybe a bit of a tightening, but not so much. High Yield and Subordinated Notes can see more. “

Europe

High yield issuers controlled the region’s syndicated bond market on Friday, accounting for three of the day’s four deals as global credit risk sentiment improves.

The financing arm of US auto parts maker Dana Inc., Italian tech companies Lutech SpA and Cedacri SpA are launching new deals that are expected to close by market close, with weekly issuance expected to reach 33.5 billion d euros, according to data compiled by Bloomberg fell for investment-grade and high-yield bonds as more subdued commodity prices helped allay investor worries about inflation risks

Asia

A surge of borrowers earlier in the week boosted sales of dollar bonds in Asia ex-Japan, as issuance doubled from the previous week.

Bond sales hit $ 8.4 billion from $ 4.2 billion the week before, the highest in three weeks, according to data compiled by Bloomberg At least 22 borrowers entered the market this week busiest in 2021 since January in terms of number of transmitters. was the biggest bond sale this week, followed by a $ 707 million bid from JSW Hydro Energy and a $ 650 million note from Cathay Pacific Airways. the yield premiums on high-quality bonds from Asia, excluding Japan, and the cost of protecting against such debt both fell by 1 to 2 basis points on Friday, traders said

we

The revenues of Alibaba Group Holding Ltd. topped estimates after China’s e-commerce leader experienced a post-pandemic recovery and began to overtake a deadly antitrust investigation

As cash balances increased to $ 70 billion, financial flexibility could allow Alibaba to weather an extended period of coronavirus-related macroeconomic uncertainty, as well as regulatory risk, better than tech-centric peers. the material, write Bloomberg Intelligence credit analysts Robert Schiffman and Suborna It seemed almost certain that the offer would at least match union projections of $ 45 billion this week after Monday’s nearly $ 28 billion windfall, however, macroeconomic uncertainty fueled by inflation fears appears to have dampened the issue of less than $ 3 billion on Thursday, bringing volume up for the week. to $ 42 billion

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