Selloff Grips Credit Funds as Rate Fears Ripple Through Markets
Corporate bond investors finally joined a selloff that has shaken stocks to Treasuries as investors spooked by U.S. interest-rate risk headed for the exits. Investors pulled $14.1 billion from debt funds, the fifth-largest stretch of redemptions in the week through Feb. 14, according to a Bank of America Merrill Lynch report, citing EPFR data. High-yield bonds lost $10.9 billion alone, the second highest outflow on record. As benchmark Treasury yields traded at a four-year high, it shook the foundations of a key support for risk assets — low rates. “Investors don’t sell their cash bonds in a big way until they are forced to, which happens when the outflows start picking up more sustainably,” Morgan Stanley strategists led by Adam Richmond wrote in a recent note to clients.
Creeping corporate leverage is setting the stage for a broader market meltdown while higher real rates drive down asset values, according to Morgan Stanley strategists, who project negative returns for corporate bonds in the U.S., Europe and Asia in 2018. They warned that companies would struggle to refinance rising debt loads, just as rates rise and a tide of ‘tourist’ investors who’d dabbled in riskier debt abandon ship. “It’s a wake-up call that central banks are withdrawing liquidity, and that the process is not going to be smooth,” Morgan Stanley strategist wrote. The iShares iBoxx $ Investment Grade Corporate Bond exchange-traded fund posted a record one-day outflow Wednesday, the most among U.S.-listed passive vehicles across asset classes.
High-Yield Bond Sales Stumble in Europe and May Fall Further
For leveraged borrowers hoping to tap the European bond market, February is proving to be the cruelest month. Sales of high-yield debt are falling fast — and some investors expect the slowdown to continue. Non-financial corporates have priced 7.1 billion euros-equivalent ($8.9 billion) of speculative-grade notes since the start of 2018, according to data compiled by Bloomberg, a 38 percent drop from the same period last year. The drop off follows a bumper year in 2017, which saw record corporate sales as rock-bottom interest rates fueled demand. New issuance is likely to keep falling, said Marco Salcoacci, a portfolio manager at Frankfurt-based Union Investment Privatfonds GmbH, whose credit department manages high yield assets worth 2 billion euros. That’s partly because opportunistic issuance will fall as the cost of borrowing rises, “leaving us with the deals that need to be done.” The Markit iTraxx Crossover index of credit-default swaps insuring speculative-grade company debt hit its highest level since April, in a sign that the volatility triggered by an equities sell-off in early February has caught up with the market. The cost of borrowing has also climbed, with average yields on high-yield bonds rising to 3.4 percent Wednesday, their highest since late April 2017 and up from as little as 2.8 percent three months ago, Bloomberg Barclays index data show.
India Stocks Fall as Deficit, Fraud Complaint Weigh on Sentiment
India’s benchmark equity index declined as a widening trade deficit and the overhang of a fraud complaint by Punjab National Bank weighed on investor sentiment. The S&P BSE Sensex fell 0.8 percent to 34,010.76 in Mumbai, erasing a gain of as much as 0.6 percent. ICICI Bank Ltd. contributed the most to the decline, falling 2.3 percent. State Bank of India Ltd. was the worst performer, losing 2.6 percent. Most Asian markets are shut for Lunar New Year holidays. “Imports rising faster than exports and concern around the alleged fraud at Punjab National Bank have overcome optimism that was driven by global cues,” said Anita Gandhi, director at Arihant Capital Markets Ltd. “There’s a lack of confidence and everyone is groping in the dark to understand the tune of money lost and how it will be recovered.” India’s trade gap widened the most in four years in January as imports surged and export growth slipped, a report that came after yesterday’s market close showed. Separately, Punjab National Bank said earlier this week it had detected a fraud in its Mumbai branch. The bank dropped 2.1 percent, extending its loss since Wednesday to 22 percent. India’s second-largest state-run lender has filed complaints with India’s Central Bureau of Investigation against parties including Gitanjali Group. Gitanjali Gems Ltd. sank 20 percent for a second consecutive session. A company spokeswoman declined to comment Thursday. All but one of 19 sub-indexes compiled by BSE Ltd. declined, led by a gauge of auto makers and metal companies.