U.S. Treasury yields on Monday hit fresh highs not seen since 2008, adding to the pain for corporates who’ve issued this year. But it’s not all doom and gloom. The rate shock is leading to much more attractive entry points for investors with longer term time-frames, and creating a better environment for bond picking.
The question for investors, as valuations start to look much more attractive, is when the bleeding from rates will stop.
“These kinds of losses have been painful, but current bond yields present some value,” said Nicholas Elfner, co-head of research at Breckinridge Capital Advisors. “You’ve got to pick your spots and your issuers who can ride out a tougher economic scenario. The good news is if you’re an IG investor, those companies are designed to do that.”
Elsewhere in credit markets:
Americas
Elon Musk is the new owner of Twitter Inc., ending months of uncertainty. With the $44 billion deal now closed, a Morgan Stanley-led cohort that provided about $13 billion of debt financing to help fund the acquisition of Twitter is now saddled with risky loans that they never intended to keep on their books.
- A heap of distressed debt is expanding in the U.S. market and investors worry that a burst of defaults will follow. The amount of dollar-denominated bonds and loans trading at levels indicating distress is the largest since September 2020, reaching $271.3 billion last week, according to data compiled by Bloomberg.
- There’s one issuer considering a U.S. high-grade bond offering on Friday, according to an informal survey of debt underwriters, who declined to name the firm. The primary market has been fairly active, with a handful of new deals every day and 13 total borrowers in the week.
- Federal Reserve officials will maintain their resolutely hawkish stance next week, laying the groundwork for interest rates reaching 5% by March 2023, moves that seem likely to lead to a U.S. and global recession, economists surveyed by Bloomberg said.
EMEA
Friday brought one opportunistic deal to Europe’s primary debt market, as issuers and investors watch economic data from across the major Eurozone countries while digesting the European Central Bank’s latest rate hike.
- The singular deal from Honeywell International Inc is unlikely to be enough to boost the €17 billion of sales so far to in-line with expectations for the week.
- Germany defied expectations by reporting another quarter of economic growth yet momentum slowed dramatically in France and Spain.
- The increasing talk of a central bank pivot away from aggressive tightening could introduce an element of fear-of-missing-out in the already popular investment-grade corporate bond market.
- U.K. lenders are facing the biggest mortgage test since the financial crisis, preparing for a wave of homeowners struggling to pay their mortgage bills after borrowing costs have tripled this year.
Asia
Credit risk gauges for junk and investment-grade dollar bonds in Asia ex-Japan reached the highest since at least 2011 this week after policy concerns in China and a shock default by a South Korean amusement park developer spooked investors, putting the region in the spotlight globally.
- Asian junk bond spreads topped 1,580 basis points, a record, according to a Bloomberg index with data stretching back to 2010.
- Meanwhile, China’s offshore credit market is limping to the finish line for October, with both investment-grade and high-yield dollar bonds on track for historically weak monthly performances, with the yuan and stocks also down.
- South Korea’s financial institutions will start paying 3 trillion won ($2.1 billion) into a fund to stabilize credit markets and state-run banks will curb bond issuance, according to a statement from the banking regulator.
- China signaled a possible expansion of a key program to boost liquidity for real estate firms beset by an industry debt crisis, as distress mounts following record defaults.
- The Bank of Japan stood by its ultra-low interest rates amid fresh government support, pushing back against lingering market speculation it will adjust policy as it continues to predict inflation will cool below 2% next year.
—With assistance from Brian Smith, Jack Pitcher and James Crombie.
This article was provided by Bloomberg News.