Lending markets

The bond market rout is so bad that double-digit losses are the norm

Bonds denominated in major global currencies suffered double-digit losses following the European Central Bank’s decision to end quantitative easing.

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(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 investment grade euro corporate bonds, according to Bloomberg Debt Indices. The more rate-sensitive US dollar and sterling credit markets have already posted negative double-digit returns in 2022.

To put the fall in euro credit in perspective, its decline since the start of the year eclipses all previous routs. After the Covid pandemic hit Europe in 2020, the Bloomberg Euro Aggregate Corporate Total Return Index posted losses of up to 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 slowing economic growth would help ease price pressure. But inflation held steady and oil surged again, prompting the ECB to announce it would stop adding to the world’s biggest bond-buying program this month and raise rates. a little after.

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

Investment-grade and junk bonds tumbled in Asia on Friday, and along with their peers in the U.S., are on course for their first weekly loss since early May, as bets rise that authorities world currency markets need to do more to fight inflation.

“The Fed will raise 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 with Bloomberg Television. “We expect some sort of medium recession, but the risks are clearly on the downside.”

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Also read: Danger of stagflation prompts World Bank to cut global growth outlook

The bond sell-off is having a ripple effect on currency markets as higher Treasury yields attract more flow into the dollar.

In particular, it has put additional pressure on the yield-sensitive yen, which is now on the verge of falling to a 24-year low. This, in turn, is adding to inflationary pressures in Japan, where the local credit market has suffered a series of corporate bond cancellations as borrowing costs rise from still very low levels.

Elsewhere in the credit markets:

EMEA

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

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  • An indicator of credit market fragmentation, the gap between Italian spreads and the upper average, looks ripe for deterioration as ECB policy tightening raises the risk of widening eurozone disparities
    • The yield spread between Italian 10-year bonds and their German counterparts widened for a third day to 226 basis points, the most since May 2020
  • Corporate bond market stability may depend on stable cash flows, says UBS

Asia

Trading flow in the Asian dollar bond market slowed on Friday after a busy week in which issuers sold about $6.3 billion worth of notes, according to data compiled by Bloomberg.

  • Hanwha Energy USA Holdings Corp. mandated for a possible green bond in US currency
  • Chinese high-yield dollar bonds fell 1 to 3 cents on the dollar on Friday morning, credit traders say
  • Dollar notes from state-backed Chinese developer Greenland Holdings Corp., which stunned investors when it offered to delay a note redemption, are on track for a second week of gains as investors vote on the plan

Americas

Defaults are rising in U.S. private credit, and they could rise further as inflation and rising interest rates weigh on small business profits.

  • Investors secured a leveraged loan from CDK Global Inc., signaling that a series of upcoming buyout financings, including $15 billion in debt for the purchase of Citrix Systems Inc., could see demand relatively strong
  • Paolo Maturo joins AXA Investment Managers as senior analyst for its US Investment Grade bond funds

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