LONDON (BLOOMBERG) – Corporate bond investors are bracing for more trouble after being hammered by runaway inflation and rising yields in the first quarter.
The world’s safest corporate debt pool has shrunk by US$805 billion (S$1.1 trillion) this year, while the global junk market has lost US$236 billion (S$319 billion). Singapore dollars), according to data compiled by Bloomberg. It’s the biggest drop in the dollar since records began more than 20 years ago, following a borrowing spree propelled by record funding costs.
The crisis marked the biggest total return loss for high-quality bonds since the collapse of Lehman Brothers and the worst adverse performance since the start of the pandemic. The US investment grade market alone has seen an estimated US$440 billion in market value wiped out and is on course for the biggest three-month recession since 1980.
Credit remains under pressure from inflation, which is pushing central banks to raise rates, which in turn risks slowing the economy and causing a lot of anxiety among investors.
“We’re far enough off the inflation picture that you can’t help but think volatility will persist,” said Brad Rogoff, head of global research at Barclays.
Meanwhile, Russia’s invasion of Ukraine has heightened concerns about Europe’s ability to meet its energy needs and is further disrupting already struggling supply chains around the world.
“We really have a lot…to contend with,” said Ms April Larusse, head of investment specialists at Insight Investments, which oversees £867 billion (S$1.5 trillion). Given that “there may be endless discussions and quite little progress” between Russian and Ukrainian negotiators, “it is probably unwise to put a big directional bet,” she said.
As losses piled up, retail investors withdrew money from bond funds. Outflows are likely to intensify as they tend to lag returns by about a month, Bank of America (BOA) strategists wrote in a note Tuesday, March 29.
A recent BOA survey revealed that inflation is currently the No. 1 concern for credit investors, followed by geopolitical risk. Investors “remain bearish,” wrote BOA credit strategist Yuri Seliger.
Skeptical NATO allies are weighing whether Russia’s pledge to scale back military operations in Ukraine marks a turning point in the conflict or just a tactical shift. Hopes for progress in negotiations have helped push global investment-grade debt spreads below levels last seen before Russia’s February 24 invasion of Ukraine.
Losses came from all quarters, particularly in the investment grade market, which is more exposed to rising global government bond yields as central banks tighten policy. This is due to their higher duration, bond language for price sensitivity to changes in interest rates.
Yields on 10-year US Treasuries and German government bonds hit their highest levels since 2019 and 2018 respectively. U.S. two-year yields briefly rose above the 10-year level on Tuesday for the first time since 2019, signaling that rate hikes by the Federal Reserve could trigger a recession.