Global Investing

Record year for global bond markets in 2012

How good was 2012 for bond markets? Very good, by the look of the many records broken.

2012  was the strongest year for global high yield and investment grade debt on record, new issuance of corporate debt from emerging markets issuers was also the strongest since records began in 1980 and activity on global debt capital markets were overall up 10 percent from 2011, Thomson Reuters data shows.

Euro-denominated international corporate debt increased 69.5 percent, making 2012 issuance the second largest on record behind 2009.

According to Thomson Reuters’ report on debt capital markets in 2012:

Overall global debt capital markets activity totaled US$5.6 trillion during full year 2012, a 10% increase from the comparable period in 2011 and the strongest annual period for global debt capital markets activity since 2009.

The volume of global high yield corporate debt reached US$389.0 billion during full year 2012, a 38% increase compared to full year 2011 and the strongest annual period for high yield debt activity since records began in 1980. High yield issuance during the fourth quarter of 2012 totaled US$113.2 billion, narrowly surpassing the third quarter of 2012 and setting an all-time quarterly record.

And the winner is — frontier market bonds

Global Investing has commented before on how strongly the world’s riskiest bonds — from the so-called frontier markets such as Mongolia, Nigeria and Guatemala — have performed.  NEXGEM, the frontier component of the bond index family run by JP Morgan, is on track to outperform all other fixed income classes this year with returns of over 20 percent., the bank tells clients in a note today. Just to compare, broader emerging dollar bonds on the EMBI Global index have returned some 16 percent year-to-date while local currency emerging debt is up 13 percent.

That appetite for the sector is strong was proven by a September Eurobond from Zambia that was 15 times subscribed. Demand shows no sign of flagging despite a default in frontier peer Belize and shenanigans over the payment of Ivory Coast’s missed coupons from last year. Reasons are easy to find. First, the yield. The average yield on the NEXGEM is roughly 6.5 percent compared with  just under 5 percent on the EMBIG.

Second, this is where a lot of issuance is happening as big emerging markets such as Brazil and Mexico, once prolific dollar bond issuers, sell less and less on external markets in favour of domestic debt.  Frontier markets are filling the gap. JPM says Angola, Guatemala, Mongolia and Zambia joined the NEXGEM in 2012 as they made their debut on global capital markets. Bolivia is also set for inclusion soon, taking the number of NEXGEM members to 23 by end-2012.

Winners, losers and the decline of fear

Lipper has released its monthly look at fund flow trends in Europe, and as ever, it throws up some intriguing results.

August saw bond funds again dominate inflows, pulling in a net 20.8 billion euros and just a tad down on July’s record. Stocks funds continued to suffer, as British equity products led the laggards with close to 2 billion euros withdrawn by clients over the month. North American equity funds and their German counterparts also saw big outflows.

Looking regionally, the Italian fund sector continues to show some surprising strength. Net funds sales there topped the table for the second month running. You can see Lipper’s heat map of sales and AuM below:

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

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.

Euro periphery: Lehman-type shock still on cards

The passing of Greek austerity measures is fuelling a rally in peripheral debt today with Italian, Spanish and Portuguese yields falling across the curve.

However, one should not forget that peripheral economies are still under considerable risk of becoming the next Greece — rising debt and weak economic growth pushing the country to seek a bailout — as a result of tighter financial conditions.

Take this warning from JP Morgan:

Financial conditions have deteriorated far more in peripheral Europe than in the core. The drag from this on peripheral GDP is akin to that seen following the Lehman crisis.