European corporate bonds flourishing
A new set of data from Thomson Reuters sheds light on blossoming European corporate bond activity.
– European corporate debt totals $75 billion so far during 2012, up 83% over the same period in 2011, and a year-to-date total only surpassed by 2009 in the last decade. January 2012 saw $48 billion raised, the strongest month since March 2011 ($50 billion). With a week to go before the end of the month, February issuance is already up 68% over February 2011.
– German, UK and French borrowers dominate the European corporate bond market, accounting for 69% of all issuance. The Energy & Power and Industrials sectors are particularly prevalent in Europe, accounting for over 44% of the market.
– New banking regulations arising from Basel III are driving borrowers away from the loans market, and into the bonds markets. Borrowers are also favouring bonds over loans for funding because of favourable coupons, a quicker deal closing process and good liquidity in the bond markets. Deals have been regularly oversubscribed and market sentiment is good.
Global brewer SABMiller’s financial subsidiary SABMiller Holdings tops the issuance league with its $7 billion 2022 bond which has a coupon of 3.75 percent. The company is using the proceeds to repay part of the bank borrowing taken on for the purchase of Australian brewer Foster’s last year.
For more on corporate bonds, click on the following:
Credit rally: Bubble or not?
Corporate bonds are back in vogue this year but how sustainable is it?
Just to highlight how bullish people have become, see following comments from fund managers:
“We do see scope for 2012 to deliver narrower corporate credit spreads and that will be the major positive contributor to fixed income returns this year.” – Chris Iggo, CIO Fixed Income, AXA Investment Managers)
“Corporate bonds should be a major source of performance for the bond component of Carmignac Patrimoine (fund) in 2012.” – French asset manager Carmignac Gestion
Bank of America Merrill Lynch’s performance data as of end-Jan shows high-yield bonds are the second best performing in the bond group with YTD gains of 2.9%, ahead of 10-year Treasuries at 0.8 percent. The best performing is “preferreds”, a sort of hybrid bond/equity instrument which returned 4% this year already.
BofA’s investment team thinks equities will catch up and outpace bonds over the medium term however, because equities have had secular underperformance, pension funds and other clients are structurally under-positioned in stocks, and relative valuations favourequities.
The bank also warns: “Recent inflows into high-yield funds have been bubble like, with record-setting inflows into HY bonds.”
Iggo from AXA is also cautious.
Calling CCCs
Junk bonds have enjoyed a rally since the start of the year but investors are facing a dilemma.
Should you buy larger, more liquid bonds that have already risen significantly, or buy smaller, illiquid bonds that have an attractive price?
Barclays Capital says triple-C rated bonds — the riskier segment of the junk space — are beginning to catch up with less risky issues because higher rated bonds have increasingly run into “call constraints”.
(For non bond geeks: Some corporate bonds have an embedded call option that allows the issuer to redeem the debt before its maturity date. )
Barclays says as of Wednesday’s close, 71 percent of callable BBs and 57 percent of callable single Bs were trading above their next call price, compared with just 29 percent of CCCs.
Corporate bonds in sweet spot
Anticipation is running high for the ECB’s LTRO 2.0 due on Feb 29.
The first such operation in December has largely benefited peripheral bonds even though estimates show banks used a bulk of their borrowing (seen at just 150-190 bln euros on a net basis) to repay their debt, as the graphic below shows.
At the second LTRO, banks are expected to use the proceeds to pay down their debt further. That is a good news for non-bank corporate credit because banks — busy deleveraging — are more likely to repay existing debt than roll over and existing holders of bank debt will need to look elsewhere to allocate their assets.
“Apart from the shrinking size of (European bank bonds) some investors might want to get out of them anyway and allocate assets somewhere else… Credit spreads are pricing in a very pessimistic scenario. There’s a very good value in non-banking credit,” says Didier Saint-Georges, member of the investment committee at French asset manager Carmignac Gestion.
Credit rules, ok?
Equities may be the poster child for this year’s market recovery, but corporate bonds have been the runaway outperformer.
As the graphic below shows, corporate debt was less volatile and moer profitable over the past nearly three years of crisis and recovery — even “junk” bonds.
This year’s performance for corporate bonds has been stunning. In December last year, the spread between global large cap company debt and U.S. Treasuries was 155 basis points, according to Bank of America Merrill Lynch. It has now narrowed to around 52 basis points.
The performance of high-yield, or “junk” bonds, has been even better. From a spread of 2,193 basis points in December, the BoA-ML global high-yield index now registers 773.
And what now? Investors still like the asset class, but there is evidence that the degree of passion may be cooling.
(Graphic: Scott Barber)
from Funds Hub:
Listen to LV’s Tom Caddick
Tom Caddick, fund of funds manager at LV= Asset Management, talks about his funds' allocation to equities and his positive outlook on corporate bonds.
Please invest, please
Hardly suprising that investment funds want their clients to cough up some money. It is, after all, how they get paid. So an appeal to pension funds from UBS Global Asset Management to stop sitting on the fence is not entirely pro bono. Nonetheless, a new note from the firm that trustees are actually risking things by hanging on to large cash reserves is worth a run through.
First, it says, there is the danger that they will lose out on any market recovery. UBS reckons stocks are well priced with high expected returns. It did not say so, but people sitting on cash in late November to early January missed a more than 25 percent rally in world stocks.
Second, UBS reckons hanging on to cash is not a good move given the amount of higher-yielding low-risk investments currently available. Some investment grade corporate bonds are trading at 10 percent-plus yields.
Finally, UBS says that in their aversion to risk pension funds should be careful not to make things worse. If asset values don’t go up as much as liabilities then pension fund deficits widen.
UBS’s message is basically this: Get out from under the mattress.
YOU & US…to most investors, at this moment in time, is all about TRUST and even though UBS is positioned well to benefit from any upswings and has lots of market savvy. YOU will just have to wait, along with the rest of Wall Street, until US feels that the “MOJO of the Market” returns. The question everyone is asking: ” How low can it go?”. At a time where one News Story can drop the market several hundred points…its just too dicey to invest in anything…hold those greenbacks…they will buy more later is the sentiment…and UBS, like the rest, can’t do anything about it.
Global government-backed bonds surging
Government-backed lending programs around the world have sparked a revival in financial and corporate borrowing — for now. Worldwide sales of corporate bonds rose to $251 billion in January, the highest level since May 2008, marking the first signs of a thaw after a long global capital markets winter. The following are the global sales totals and a list of the biggest borrowers, according to Thomson Reuters data.
Top Temporary Liquidity Guarantee Program (TLGP) Issuers
Corporate and Government Guaranteed Debt – Global
Desperately seeking yield
Equities may be having a stop-start kind of month, but investors do seem to be more willing to take on risk than before. The latest numbers from EPFR Global, a tracker of investment flows, show high-yield bond funds raking in the money in the second week of January. A net $766 million flowed into the HY funds tracked by the firm. At the same time, a net $578 million flowed into U.S. municipal bond funds.
The drive behind these flows is a mix of a desperate search for yield and a belief that the risk might well be worth taking. Investment grade corporate debt is considered to be priced at Armageddon levels. That is, the price assumes too much trouble ahead than is likely. This has led, for example, to a monthly record in new bond issuance in January in Europe.
High yield is not pricing in quite as extreme a default rate from a historial perspective. But it is still evidently attractive, hence $3.38 billion in global net inflows over the past seven weeks.
Municipal bonds, meanwhile, may be getting a boost from expectations for the incoming Obama administration. EPFR says U.S. investors are anticipating higher taxes, which would help municipal finances.
