(Bloomberg) — Borrowing costs are rising in global debt markets as investors prepare for the end of an era of loose monetary policy.
In Europe, borrowing costs for the most credit-worthy companies rose above 1% for the first time since the summer of 2020. Meanwhile, the window for the junk market to refinance at cheaper rates is now closed. And the worldwide cost of protecting against defaults for both investment grade and high-yield firms is rising.
Investors are scrambling for more aggressive policy positions from the Federal Reserve to the Bank of England and the European Central Bank as officials try to tame runaway inflation. An unexpectedly strong US jobs reading on Friday added to the case for the Fed to raise rates, propping up US credit risk gauges and stirred Asian markets on Monday.
“It’s a crazy situation with all the speculation about a rate hike at the moment,” Michael Köhler, a credit strategist at Landsbank Baden-Württemberg, said over the phone. “Long term, we believe being overweight is good but for now investors are feeling the pressure.”
The pace of the moves has taken analysts by surprise. Last week, strategists at Commerzbank AG became the first to target significantly widening, saying that widening is “ready to kick off more strongly” earlier than they thought.
European junk firms that have not already reduced their debt burden by issuing low-coupon bonds have missed their chance, according to the one-day gap Bloomberg Index.
Market volatility is proving to be a major deterrent for some borrowers. Last week, a group of banks led by Barclays Plc was forced for the second time to delay a $1.2 billion cross-border loan sale to Apollo-owned Covis Pharmaceuticals Inc. The deal struggled to attract demand from investors even after the terms were sweetened.
Even secured corporate bonds have to offer higher compensation. The average yield on euro investment-grade corporate bonds, based on the Bloomberg index, jumped nearly half last week to 1.1%.
The cost of protection against default for a basket of European high-ranking firms continued to rise on Monday: it now takes 66,000 euros ($75,500) annually to insure 10 million euros of debt, up from 58,800 euros a week ago.
‘stock picking’
Ben Pakenham, head of European high-yield and global debt at Aberdeen Standard Investments in London, said: “At this time it is more important than ever to choose stocks in credit, investors can’t really afford to get caught up in so much volatility. ” The momentum and uncertainty about the number of hikes this year has “sent long-term credits into a tailspin.”
Even before last week’s fall, investors were showing caution. The sweetness they sought to buy new bonds, known as new issue concessions, had more than doubled from the same period last year. And when borrowers offered more than one installment in the market, buyers showed a preference for the smaller one, which is less likely to lose value when returns increase.
Still, there may be opportunities for the intrepid. Volatility in the Euro High-Grade Tracker, using a 30-day metric, has reached its highest level since June 2020, providing investors with a buying opportunity.
“There should be some value to those willing to step out of the cold waters of the next few months before the inflation picture cools somewhat,” CreditSights strategists wrote in a note to clients on Monday.
EMEA
The long-awaited UK gilt and a potential release from the EU this week could boost SSA sales and put the sector again in Europe’s publicly syndicated debt market.
- So far, four issuers in five slices are up for deals on Monday worth at least 2.4 billion euros.
- The UK’s Office of Debt Management has said new traditional gilts maturing in 2073 are planned to be launched by syndication this week
- The European Union plans five NextGenerationEU bond sales via syndication in the 1H of 2022, with one proposed for this week.
Of America
As the prospect of aggressive central-bank rate hikes grows, US debt markets are showing signs of stress, with higher grade spreads becoming their highest since November 2020.
- According to people with knowledge of the matter, Carlyle Group Inc. is in advanced discussions to acquire Todd Boilly’s CBAM Partners investment firm, as the private equity giant seeks to expand its reach in the credit markets.
- No company sold US high-grade bonds on Friday amid US jobs report
- A lot of deals are found in junk bonds, with high-coupon debt trading above par, which can be called early, says Michael Buchanan, deputy chief investment officer at Western Asset Management.
- For Deal Updates, Click Here for New Issue Monitor
Asia
Chinese high-yield dollar bonds dropped Monday morning, with notes from developer Logan Group Co taking a major hit as traders in mainland China pulled back after a week off.
- The global bond route extended due to a sell-off in Australian notes and a 0.205% increase in the 10-year Japanese government debt yield since January 2016
- The primary Asia dollar bond market was muted, extending a slow pace around the Lunar New Year holiday
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