Strong bond yields mask risk of market pain ahead

(Bloomberg) — The year of the bond is in danger of hitting the wall.

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Global credit markets just ended their second straight quarterly rally as buyers flocked in, betting that the United States can keep inflation under control while avoiding a hard landing. Best first quarter gain since 2019 after worst year ever for senior bonds, and the rest of 2023 looks increasingly tough.

The crisis that toppled Silicon Valley Bank and Credit Suisse Group AG has raised concerns about the stability of the global economy, as well as rising recession rates while inflation remains subdued. High. Meanwhile, tighter monetary policy puts pressure on the riskiest companies by increasing borrowing costs.

“The fastest rate hikes on record are sure to cause disruption and order,” said David Knutson, head of US fixed income products at Schroder. “The market is still uncertain who won’t have a chair when the music stops.”

Even high-quality companies will have a hard time if households concerned about the future pull back on spending. That can create a negative feedback loop for credit, Knutson said.

“There is a lot of complacency about the risks that come from financial tightening,” said Gordon Shannon, portfolio manager at TwentyFour Asset Management. “Banks increase lending standards, lend less, lend at higher interest rates and require higher security – all of which leads to a severe slowdown in the real economy.”

The good news is that most investment-grade companies are still considered relatively well-positioned with high levels of cash to support them through the downturn. Some may fall into the trash – although not at the same rate as during the pandemic – but the higher maturity characteristics of investment-grade bonds mean investors will benefit if the cycle goes hiking pause or reverse.

Todd Schubert, head of fixed income research at Bank of Singapore, said: “With a combination of volatility still increasing, interest rates are likely to fall and the curve is steeper over time. For the rest of the year, our priority will be on the Asian type of investment.”

But pressure is mounting on junk companies to raise capital at higher interest rates, even as earnings are slowing. The premiums that the lowest-rated companies need to pay to issue new versus high-grade debt spiked in March.

“We’ve seen some signs of increasing difficulty in the market,” said Amanda Lynam, head of macro credit research at BlackRock, in an interview on Bloomberg TV on Thursday. Credit. “The market is signaling that there are some concerns right now that are mainly focused on the low-quality segment.”

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Lynam said BlackRock is wary of companies from sectors like retail, restaurants and healthcare that have high variable costs and limited pricing power. Meanwhile, piles of bad loans and bonds in the Americas are high, and companies are filing for bankruptcy at the fastest pace since 2009.

In other place:

  • For all the appeasement from bank regulators and politicians, Credit Suisse’s controversial risk-off write-off caused a major ripple effect in the value-added tier 1 market. worth 256 billion dollars. Yields are near record highs amid growing concerns that banks will break convention by not buying these bonds anymore, leaving investors stuck with debt.

  • JPMorgan Chase & Co., Goldman Sachs Group Inc. and Barclays Plc are among major banks looking to start a private credit lending business as they seek an entry point into the lucrative world of direct lending. If successful, this move will likely reshape much of the buy-and-hold market.

  • German real estate company Aroundtown SA has offered to buy back a discount bond – and pause its dividend – amid a wild swing in its share price as investors worry about the impact of the move. interest rate hikes on leveraged European real estate companies. It is looking to buy back 400 million euros ($434 million) for between 71 and 83 cents, a price that typically reflects a troubled credit.

  • In a dramatic reversal, state-backed Chinese developer Sino-Ocean Group has paid its coupons in perpetual dollar bonds after an earlier decision to defer payments sent foreign bonds Their exterior skyrocketed to miserable levels. Bonds recorded record gains in response, lifting China’s high-yield markets.

  • Sunac China Holdings Ltd., once one of the country’s five largest developers, detailed its debt restructuring plan 10 months after default. Holders will receive new debt maturing in 2 to 9 years, and can swap the debt into shares of listed institutions.

  • Adani Group executives met with U.S. investors as part of a plan to market private placement bonds to some of the group’s companies. The meetings are part of a global outreach that has reached US cities including New York, Boston, Los Angeles and San Francisco, as Adani seeks to reassure international investors that his finances are Empire transformed from port to power is under control.

  • Vedanta Resources Ltd. is exploring its options, including selling a minority stake in Vedanta Ltd., in an attempt to ease the massive debt burden of its commodity empire. It has nearly $2 billion in bonds to pay off in 2024 — half of which are due in January.

–With assistance from Alice Huang, Catherine Bosley, Bruce Douglas and Diana Li.

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