Friday, January 21

Bond Investors Prepare for Worst Year in Decades with a Hardline Fed


Global bond investors are facing their worst year right now in more than two decades after a September selloff sparked by aggressive remarks from central bankers, including Federal Reserve Chairman Jerome Powell.

The Bloomberg Global Aggregate Index, a benchmark for government and corporate debt, has lost 4.1 percent so far this year, the biggest drop in that period since at least 1999. Powell comments last month from that the Fed could begin to reduce bond purchases in November and a closer move by the Bank of England to rate hikes prompted a rise in global bond yields.

There were few places for fixed income investors to hide in September as they moved quickly to price on lower central bank support and the risk of higher inflation brought on by improving economies seeing fewer instances of Covid-19. High-yield indices for US and European corporate debt suffered their first monthly declines of 2021. The Bloomberg Global Aggregate Index lost 1.8% in September, its biggest drop since March.

While benchmark 10-year US Treasury yields had retreated from their highest levels since June on Friday, markets remain poised for further rate hikes. Investor concerns prevail in global markets that central banks underestimate inflationary risks as an energy crisis in countries like China pushes prices higher.

“We think the bias is for rates to keep going up in October,” said Todd Schubert, head of fixed income research at Bank of Singapore Ltd.

The ability of Democrats in the US to bridge gaps in President Joe Biden’s economic agenda, including a tax and spending plan totaling up to $ 3.5 trillion, will also be key in determining how much they go up. rates and how bond yields end the year. House Speaker Nancy Pelosi sent lawmakers home Thursday night without voting on a $ 550 billion infrastructure bill, with plans to try again Friday after moderate Democrats and progressives failed to agree on the rest of Biden’s spending plans.

Higher rates are not the only concern for bond investors.

The debt crisis at developer China Evergrande Group has pushed losses on China’s junk banknotes to 13% so far this year and has also reduced emerging market bond yields. Emerging market dollar banknote gains from 2021 to August canceled out last month as markets convulsed.

“Until the uncertainty surrounding Evergrande subsides, we do not expect a sharp rebound in corporate credit from emerging markets,” said Bank of Singapore’s Schubert.

Some are less bearish for bonds.

“After a ‘mini tantrum’ in bonds, I expect a respite in October, but not a sharp downward reversal in yields,” said Winson Phoon, head of fixed income research at Maybank Kim Eng Securities in Singapore. “The current rate prices appear more reasonable and additional increases would require strong impressions of the economic data.”

Europe

The European credit market is beginning the new month and the last quarter of the year cautiously, following the falls in broader markets. In the region’s primary market, the portfolio has shrunk in typical Friday fashion after issuers listed more than € 200 billion worth of bonds across the market in September.

  • Friday’s deals were limited to just two sustainable debt offers from Nederlandse Gasunie and Southern Housing.
  • Banks and financial institutions have sold more than 76 billion new bonds in Europe during September, the busiest month for the sector this year.

Asia

Today is a public holiday in China, including Hong Kong.

U.S

September ended on a whimper on Thursday when just three companies added $ 1.65 billion of high-quality supply from the US, closing the month with just over $ 158 billion sold.

  • Only two companies remain on the US high-yield bond market agenda after eight borrowers sold $ 9.95 billion of debt on Thursday.
  • Pulp mill operator Domtar Corp. may sell seven-year notes on Friday, while Platinum Equity LLC continues to trade bonds that will finance its acquisition of Oregon Tool Inc.

© 2021 Bloomberg


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