Fears of rising interest rates and warnings about bond valuations have made rotten and investment rated bonds a popular short bet among hedge funds.
Speculators predict further pain for the bond market, especially longer-dated bonds, with sovereign yields set to rise due to higher inflation expectations. It comes in the middlewarnings from market experts regarding “over-stretched” valuations of CCC-rated bonds, the riskiest class of debt.
According to data from IHS Markit Ltd., global high yield bonds worth up to $ 55 billion are on loan to traders looking to make a profit if prices fall, according to data from IHS Markit Ltd., the highest balance since fall 2008. That compares to around $ 35. billion at the start of the year.
In the high-quality euro-denominated market, the equivalent of around $ 30 billion in bonds was borrowed, the highest loan balance since early 2014.
“I would expect this list to grow as spreads tighten and / or people worry about rate hikes,” said Tim Winstone, portfolio manager at Janus Henderson, who oversees 294 billion pounds (409 billion dollars). “At these valuation levels, I’m not surprised that more people, like hedge funds, are putting on shorts.”
Bond investors, including Pacific Investment Management Co., have beenthe reduction in large-scale bullish bets in recent times, citing costly valuations after a rally that has lasted for more than a year.
This trend has an impact on the performance of transactions in the secondary market. Nearly one in four high yield bonds sold this year is listed below the price at which it was issued, based on data compiled by Bloomberg.
The trend has been attributed to so-called quick money hedge funds that seek to sell debt quickly at a profit, or at short interest.
A 275 million euro deal struck by Standard Profil Automotive GmbH fell four cents on the euro just days after primary market pricing last week. The deal is one of the worst results among the 2021 numbers, behind just two ratings from Icelandic retailer and packing group Kloeckner Pentaplast.
Investors are putting up defenses against a potential reduction in central bank support. While the Federal Reserve maintains it is not yet ready to discuss reducing asset purchases, investors are betting the U.S. central bank will be under pressure to do so later this year. Meanwhile, the European Central Bank may decide to trim its emergency bond purchase programas early as next month if the euro area economy does not deteriorate.
On Thursday however, the Bank of England said it did not intend to tighten until there is clear evidence of a rebound. UK 10-year government bond yields have fallen for four of the past five weeks, and risk premiums on corporate debt in sterling have traded near their post-financial crisis lows.
Yet investors are also looking to secure their portfolios with the turbulence of 2013 still fresh on their minds. The Fed warned Thursday that growing risk appetite is stretching valuations and creating vulnerabilities in the US financial system.
Read more:Fed warns of asset price peril as investors reduce risk
Some say the shorting strategy is premature.
Kshitij Sinha, portfolio manager at Investments Canada Life, which oversees £ 41 billion ($ 57 billion), does not yet see any potential for a significant revaluation.
“Short selling corporate bonds for cash just to widen spreads is very expensive,” he said. “You’d better express this point of view through CDS, either in one name or in clues. “
European credit risk is at the center of concerns after macroeconomic data from the world’s largest economies showed a recovery is well underway.
- Crédit Agricole joined regional peers to post strong business performance, as first quarter profits surged and recorded lower-than-expected charges to cover potential loan losses
- Some German companies have also reported promising profit figures, with Adidas increasing its sales forecast for 2021 and Siemens raising its expectations for its net 2021; BMW reaffirmed its outlook for the year and said its automotive Ebit margin will come to the high end of its forecast
- The primary credit market is expected to slow today as the week draws to a close; Erste plans to offer inaugural sustainability bond, while FMO could provide $ 5 guarantee
- At the same time, the European Central Bank could decide to cut its emergency bond buying program as early as next month if the euro area economy does not deteriorate, according to Martins Kazaks, member of the Governing Council. .
Aviation industry issuers focused on the primary Asian dollar bond market on Thursday, with BOC Aviation offering 3-year notes and Cathay Pacific mandating banks for the sale of dollar debt, which is believed to be the first since the 1990s.
- BOC Aviation’s bond came after the aircraft finance company has raised more than $ 1 billion so far this year, according to data compiled by Bloomberg.
- Spreads on Asian investment grade dollar bonds widened by up to 1 basis point, traders said, as investors assessed factors including the latest pandemic setbacks. But they stay down over the year and near the lowest since early 2020
- Naver Corp. has received over $ 650 million in orders for its $ 300 million banknotes
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- International Business Machines Corp. was demoted by S&P Global Ratings one notch to A-. Rating firm said a frenzy of acquisitions added doubt to the tech firm’s timetable for reducing debt
(Updates with reference to Pimco’s positioning in the fifth paragraph)