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Investors in Europe’s corporate bonds dumped their holdings at a record pace last week as fears of an economy crumbling under rampant inflation and sliding into recession took hold of the market.
Much of the worry stems from indications that the European Central Bank will raise interest rates in July, denting the economy, the Financial Times noted.
Fears were stirred by “inflation being stickier than expected,” Vivek Bommi, chief of European fixed income investments at AllianceBernstein told the FT.
“In September, the word used with inflation was ‘transitory’,” he said. “I don’t believe anyone uses that word any more.”
Also, returns on bond investments have slid 10 percent since their peak last September, the greatest plunge since at least 2000 for an asset class thought to be safer than stocks, ICE Data Services reported.
In addition, the spread between yields on government and corporate bonds has grown recently, indicating investors’ concerns that a larger number of companies may have trouble paying their debts if interest rates rise, the FT said.
Junk bond returns are off 10 percent so far this year, ICE said, with their spread rising from 3.31 percent to 5.15 since 2022 began.
“There’s been a synchronized sell-off that’s been interest- and inflation-driven, with high quality [assets] underperforming low quality,” Michael Scott, a Man Group portfolio manager, said in an FT interview.
“We expect this to reverse as we go into the second part of the year,” he added, a prediction that the market will begin to right itself this summer.
TRENDPOST: It is more than European corporate bonds that are being sold off.
A primary market for gamblers seeking high yields before interest rates began to rise, was the Asian junk-bond market. Nearing $300 billion in size, in part as a result of booming bond sales from big Chinese real estate developers, now with some real estate developers defaulting, over $100 billion has vanished from the bond index.
As reported by Barclays Research and Bloomberg, the total market value of Asian high-yield bonds is now around $184 billion, and that does not include defaulted debt. After a company defaults on their bonds they no longer exist on the global bond index. Therefore, the total face value and market value of the benchmark’s total is reduced.
As reported by The Wall Street Journal, “The fallout has also affected demand for new bond deals. In the year through May 10, Asian high-yield issues sold just $2.5 billion in debt… down 73 percent year-over-year.”