In recent weeks, investors have been reminded how supposed risk-free assets, like Treasuries and bunds, can still inflict substantial losses. So far in the second quarter of this year, 10-year yields have risen by nearly 0.48 per cent in Germany and by 0.31 per cent in the US.
As a result, the JPMorgan GBI Global bond index is down 2.72 per cent in the year to date. With bond yields expected to drift higher as global growth and inflation pick up, this will continue to be the case. Puchasing bonds with wafer-thin yields means there is no cushion for capital losses.
Even locking in current bund yields of around 0.70 per cent, an investor would make a zero annual return if yields inch up by just another 0.07 per cent. A rise in yields of 0.25 per cent would be enough to erase dollar returns of ten-year Treasuries yielding 2.23 per cent today. Read more
By Giancarlo Bruno and Michael Drexler of the World Economic Forum
Are emerging countries facing a corporate bond market bubble? That was the central question in a recent article in the FT, which cautioned that foreign investors are pouring too much money too quickly into emerging corporate bond markets.
Indeed, emerging market activity appears higher than ever before: hard currency emerging market bond issuance reached a record $480m last year, driven by global investors’ search for yield. Yet despite this influx of capital, companies in emerging countries often still have difficulty raising bond proceeds. Read more
With a flock of ‘fallen angels’ from Russia and Latin America re-shaping the euro-denominated high yield bond market, investors are scratching their heads about whether they are a blessing or a curse.
Victims of the falling oil price and of Russia’s invasion of Ukraine, a group including Brazilian heavyweight Petrobras, a host of Russian banks and Russia’s largest oil firms Lukoil, Roznek and Gazprom have been downgraded by the credit rating agencies, and fallen out of investment grade status and into the riskier high yield – or ‘junk’ – bracket. Read more
Beyondbrics recently warned that spiralling interest payments on hard currency bonds might yet cause EM corporates a big headache. The pain may be drawing closer: the recent slide of Asian currencies against the dollar looks even worse when you strip out the renminbi, which is holding its own, and the Japanese yen.
Source: Record Currency Management
There could be a serious knock-on effect on domestic banks if firms are forced to loot cash deposits to meet debt repayments. Read more
Turkish corporates have come late to the eurobond market, with $4.1bn in foreign currency bonds outstanding last September, up from just $400m at the end of 2012, according to the Bank for International Settlements.
Should investors be worried? After all, the surge in issuance has come during a period of turmoil for the lira and other EM currencies, and issuers risk being found guilty of original sin. Read more
By Shamaila Khan of AllianceBernstein
Emerging market corporate debt has returned big numbers for investors in recent years, as the sector rode a general wave of optimism. But those days are gone. In 2013, successful investors have had to take a more painstaking path.
This year, investors have succeeded by making careful decisions on securities only after scrutinising balance sheets and management teams, and identifying pockets of opportunity—while avoiding defaults. Latin America showcases the point. Default rates there have been very high (see chart below) but investors who avoided the region altogether missed out on some great opportunities. The problems weren’t systemic – they were idiosyncratic. Read more
In case you missed it, here’s a great chart from Robin Wigglesworth’s Local currency bond market given revamp story: it shows how investors are missing out on emerging market corporate local debt. Read the full story here; chart after the break. Read more
South African corporate bond issues are still on the up after a record 2012.
Recent figures from Absa Capital, a subsidiary of Barclay’s, show the rise continuing into 2013. If issuance so far is any indication of what’s to come in the rest of the year, an increase of more than 50 per cent looks possible. Read more
The Export-Import Bank of India has become the first Indian institution to issue bonds in Australian dollars, opening up a new market.
The bank raised $200m on Tuesday, double the amount planned, with a 5-year bond paying 5.76 per cent a year. Read more
Just when you thought yields on Latin American corporate bonds couldn’t get any lower, along comes an issue that resets the price curve all over again.
Cielo, a Brazilian card-payment processor, on Friday launched $875m of 10-year debt at 225 basis points over US Treasuries, or roughly 3.86 per cent – the lowest price ever paid by a LatAm company selling new debt of that maturity. Read more
When you have a corporate capital expenditure programme of $236.5bn, the world’s largest, you cannot stay out of the markets for long.
That’s why Brazil’s national oil company, Petrobras, on Monday returned with a €2bn offer of bonds maturing in 2019 and 2023 and a £450m offer due in 2029, according to IFR. Read more