(Bloomberg) --
In most selloffs, investors can find a few safe havens. But in this year’s corporate bond rout, a backdrop of stagflation means there is absolutely nowhere to hide.
From ultra-safe triple A to near-default triple C notes, US dollar, euro and sterling company debt has all posted negative total returns so far this year, according to Bloomberg data and Bank of America Corp. indexes.
Performance in the euro market is particularly telling, with all rating categories losing a similar amount -- between about 6% and 9% -- even after a brief rebound for credit earlier this week.
In previous market downturns, investors could seek to avoid losses by focusing on higher quality credits or avoiding safer, rate-sensitive bonds. Neither option will work now, as a combination of rate hikes spurred by soaring inflation and concern about an economic slowdown are affecting all corporate bonds.
“Nothing has been spared,” said Rhys Davies, a fund manager at Invesco Asset Management Limited. “Concerns on inflation led to an increase in government bond yields and this time around that has started to feed into spreads as well,” he said.
Returns in high-grade bonds are heavily influenced by yield moves in government bonds, as safe company debt is typically longer dated and its risk buffer to sovereign bonds is thin. Junk-rated debt, meanwhile, is less sensitive to changes in government yields and has wider spreads.
This dynamic created a divergence between rating bands in previous years. When the coronavirus pandemic first roiled markets in 2020, safe bonds outperformed while risky debt tumbled. A year later, euro, dollar and sterling junk bonds gained ground while investment-grade debt fell as government yields rose.
So far this year the losses have been universal.
In another sign of credit-market stress, the 90-day rate of change in investment-grade spreads in Asia hit the highest since 2020. That’s the second-fastest spread widening in at least a decade, behind the pandemic markets’ seize-up of that year.
Fastest Blowout in Asia Bond Spreads Since 2020 Shows End of Era
To be sure, analysts are still seeking solace in companies with strong balance sheets. But this is unlikely to prevent further losses, even in areas that investors fled to for stability.
“A lot of people are hiding in shorter-dated paper at the moment. The big risk is if EU inflation doesn’t come down and the ECB has to hike faster,” said Kamil Amin, a credit strategist at UBS AG. “The front end will come under pressure.”
Amin and his colleagues are expecting further widening in junk bond spreads and volatility in government bond yields.
Invesco’s Davies, meanwhile, is looking for value in discounted bonds, which will eventually rise to face value even if they fall further in the secondary market in the meantime. And he sees some glimmers of hope ahead.
After “such bad returns over that kind of time period, it is fair to expect markets to pause and reassess,” said Davies. “I am hopeful at least that’s where we’re going next.”
Elsewhere in credit markets:
EMEA
Seven issuers are offering new bonds on Thursday, with daily volume set to reach at least 3.8 billion euros, lifting sales for the week to at least 26.5 billion euros and above expectations of half the respondents in a weekly Bloomberg News survey.
- Schroders, Pimco and BlackRock stand to lose hundreds of millions of euros from their exposure to struggling German property firm Adler Group SA. UK money manager Schroders holds about $386 million equivalent of Adler bonds, according to data compiled by Bloomberg, with the company’s notes tumbling in recent weeks
- The European Union is looking at creating bond futures and repurchase agreements to bolster its pandemic-era debt program and support a liquid secondary market for its bonds
- Credit Bank of Moscow applied to OFSI for a special treasury license to pay a coupon on perpetual bonds, according to a statement
Asia
Asia’s credit market is suffering the fastest blowout in investment-grade spreads in two years, adding to signs that a decades-long era of easy money may be drawing to a close for a region that’s relied on debt to fuel growth.
- Sun Hongbin, dubbed the “white knight” in China for bailing out fellow billionaires and their empires, was unable to rescue his own from the property crisis that’s engulfing the world’s second-biggest economy. Sunac China Holdings Ltd joins more than a dozen developers in defaulting on dollar bonds in recent months
- Chinese high-yield dollar bonds dropped as much as 2 cents on the dollar Thursday in light trading, according to credit traders, after Sunac’s coupon default
Americas
Inflation-fueled volatility slammed the window shut on US borrowers Wednesday, following the busiest day for issuance in over two months.
- At least seven high-grade US companies opted not to sell new bonds, with bankers advising them to wait out the volatility. Credit risk had spiked after inflation data came in hotter than expected
- Leveraged loan prices have dropped to the lowest level in about 18 months amid wilting demand as investors withdraw cash from funds that buy the risky debt. The S&P/LSTA index fell to 95.70 cents Wednesday after 14 straight days of declines to the lowest level since Dec. 8, 2020, according to data compiled by Bloomberg
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