After the busiest start to any year for sovereign emerging-market debt, it’s corporate bond investors around the world who now seem to be heading for a massive case of indigestion, as ShortView noted last week.
As Bloombeg reports on Monday, the cost to borrow in the corporate bond market is rising for the first time since November, especially in Europe as a slew of banks – including Barclays, Lloyds Banking Group and more than a dozen others – sell record amounts of fixed-income securities to refinance $2,000bn of debt due for repayment this year.
Not only that, the indigestion is going global. As the FT notes, even as Europe braces for a deluge of senior bonds, in Japan and America, corporates led by banks are leading a voracious fund-raising charge – although in Japan the prime focus for banks’ fund-raising is still on equity markets.
Overall, the spread on corporate debt over government securities widened late last week, expanding 1 basis point to 161bp, according to the Bank of America Merrill Lynch Global Broad Market Corporate Index.
The last time the corporate/sovereign debt spread expanded was late last November, when it grew to 193bp from 191, or 1.91 percentage points, noted Bloomberg. Now, so far in January alone, banks have sold $96bn of securities and the increase in spreads suggests that supply is crowding other borrowers out of the market, it added.
Among corporate bond issuers, too, banks face increasing competition from industrial companies – while continuing issuance of government debt is likely to further drive up yields from a four-year low.
According to Bloomberg data, companies in Europe have sold €56bn ($80.4bn) of bonds in the region in 2010, compared with €73.9bn a year earlier. Meanwhile, nations in the region may issue a record €1,000bn this year, according to HSBC estimates. Sales globally total about $178bn, down from $196bn in 2009.
At the same time, the cost of insuring against the risk of debt default by European nations this month exceeded that for top investment-grade companies for the first time, as mounting government debt prompts fears over the health of even leading economies.
As the FT notes in a separate report, it now costs investors more to protect themselves against the combined risk of default of 15 developed European nations, including Germany, France and the UK, than it does for the collective risk of Europe’s top 125 investment-grade companies, according to indices compiled by data provider Markit.
And ECB president Jean-Claude Trichet’s warning last week that no euro-region member can expect special treatment on funding rules has fuelled speculation that Greece’s funding costs will increase, sending the cost of insuring against a loss on the country’s bonds to a record.
Yet, as ShortView’s Jennifer Hughes observed:
Demand for debt is also unlikely to dry up soon. Last year, investors piled in for the high, equity-like yields that bonds offered. Those have gone. But with stock market bargains hard to find and while credit conditions are curbing desires for a debt spree and any oversupply, corporate bonds will still find buyers.
Related links:
Appetite for risk still vulnerable to a jolt – FT
Rate rise fears spark rush to issue bonds – FT