Europe is currently experiencing its worst corporate bond sale in decades

By almost any measure, this is Europe’s worst corporate bond sale in decades, surpassing even the 2008 financial crisis.

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(Bloomberg) – By almost any measure, this is Europe’s worst corporate bond sale in decades, surpassing even the 2008 financial crisis.

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Whether it’s yields, how quickly yields have risen, or how long the selloff will last, investors are dealing with a historic punch. An investment-grade European debt index has fallen seven months in a row, its longest losing streak since its inception in 1998. The 12.9% loss over the past 12 months is also the worst in its history.

The fall, a dramatic turnaround after three decades of broadly supportive markets, is the result of central banks around the world tightening monetary policy in an effort to rein in spiraling inflation.

“We’ve been down most months this year,” said Kyle Kloc, senior portfolio manager at Fisch Asset Management. “You very rarely get these types of repeated negative returns.”

The sell-off is more intense than two comparable periods, he said: the onset of the Covid-19 pandemic, which only lasted a few weeks before central banks calmed markets, and the Great Financial Crisis. , which was a series of “sudden and rapid falls”.

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Investors are now trying to analyze how many rate hikes have already been priced into the market, and therefore how long the corporate bond rout will last.

Rate hike

UK inflation stood at 9.1% on Wednesday, with traders betting on a further 160 basis point tightening from the Bank of England this year, while economists predict the Reserve The US federal government will raise its benchmark rate again by 75 basis points in July and the European Central Bank will end negative rates this fall.

ECB Governing Council member Mario Centeno said on Friday that the normalization of the ECB’s monetary policy will take place gradually. That outlook didn’t prevent European bond funds from having their worst week of outflows since March 2020, according to EPFR Global data cited by analysts at Bank of America.

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“It’s probably one of the most difficult years we’ve had, but also one of the most interesting in terms of asset management,” said Grégoire Pesques, head of the global credit team at Amundi. SA, Europe’s largest fund manager. “Given that the liquidity is still there, there are opportunities to be found – and growing yield attractiveness.”

Meanwhile, recessionary indicators are flashing, with copper prices – seen as an indicator for the global economy – falling to a 14-month low.

For bond watchers, the higher borrowing costs facing businesses will only put more pressure on the brakes on the economy. “We could see earnings impacted due to this rather unexpected rise in the cost of debt,” said Timothy Rahill, credit strategist at ING.

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The average yield on euro corporate bonds rose 2.9 percentage points this year to 3.4%, according to a Bloomberg index. This compares to a 1.62 point increase in 2008, the second highest.

There’s a way corporate bonds have fared less well in previous crises: the gap between what borrowers paid and the benchmark widened further during the eurozone debt crisis. from 2010-2012, for example.

But that compounds the problem for bond investors; unlike then, underlying benchmarks such as German bunds have also sold off strongly now, leaving them with few options to invest their money. And even here, option-adjusted spreads topped 200 basis points on Friday – a level previously seen almost exclusively when a major risk event occurred.

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As corporate bonds begin to mature in this environment, soaring borrowing costs will really be felt, both in credit ratings and in companies’ ability to repay debt.

“In other words, more downgrades and more defaults,” ING’s Rahill said.

Elsewhere in the credit markets:

EMEA

There were no new transactions in EMEA on Friday after a week in which issuance beat expectations amid widening credit spreads and worries about a possible recession began to surface .

  • Money markets are rapidly cutting bets on how much tightening the European Central Bank is on course for this year as they fear the region could slide into a recession
  • Once a darling of the renewable energy industry, Abengoa has been struggling for years. Now his main operating company is at risk of collapse after a government agency rejected a request for an emergency lifeline
  • A fund backed by Elliott Capital Management has provided British clothing retailer Matalan Ltd. a rescue loan to help refinance debt due in July
  • Universal Music Group on Thursday became the fourth non-financial corporate borrower this week to offer two-part euro-denominated bonds, following in the footsteps of BASF, VW Financial Services and Rentokil Initial Finance.

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Asia

Asian high-quality dollar bond spreads headed for a second straight day of widening as recession fears sapped investors’ risk appetite, which also dampened activity in the primary market. Thursday.

  • Dollar bonds weakened after Federal Reserve Chairman Jerome Powell acknowledged recession risk: Spreads on investment-grade notes in the region widened by at least 2 basis points on Thursday, while that Chinese junk notes fell 1 to 2 cents on the dollar on average, credit traders said.
  • Concerns over the outlook for China’s private-sector property companies also weighed on sentiment after its biggest developer Country Garden Holdings was downgraded to junk by Moody’s Investors Service on Wednesday.
  • Changde Economic Construction Investment Group was the only issuer to market a dollar bond in the region
  • Meanwhile, in China’s credit market, the Credit Derivatives Determination Committee on Wednesday accepted a request to review a “credit default” event on a Shimao dollar bond due June 14, according to a statement; which has pressured the company’s onshore and offshore ratings on track to new lows
  • Chinese conglomerate Fosun International told Bloomberg News in a statement on Thursday that it has ample funds and will continue to manage its debt “in advance in a variety of ways going forward.”

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Americas

U.S. high-quality bond investors have pulled cash from funds buying debt for 13 straight weeks, extending the longest losing streak on record.

  • An outflow of about $7.5 billion for the week ended June 22 follows last week’s withdrawal of $8.7 billion, according to data from Refinitiv Lipper. The total amount of outflows during this period has now reached $55.7 billion, according to the data.
  • The biggest buyers of U.S. leveraged loans are increasingly turning to the bond market to find better value
    • According to a recent report by US Bancorp, fund managers who buy syndicated bank loans and bundle them into US secured loan bonds have started to add more corporate bonds.
  • No high-quality deals or investor outreach events were announced after three borrowers shrugged off softer backdrop and a weak open on Wednesday to assess just over $3 billion in new debt
  • New York’s largest mall Destiny USA has reached a deal with lenders to avoid a default after the pandemic and years of retail turmoil have left it deep under water on its mortgages
  • Avaya Holdings Corp. offers the highest margin of the year on a leveraged loan that will refinance an upcoming convertible bond maturity, another sign of rising borrowing costs for risky U.S. issuers in a rout credit

(Adds ECB Centeno comments, bond flow data.)

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