Asia is leading the worldwide retreat in newly issued corporate bonds after surging issuance and a strengthening global economy spurred some investors to favor equities.
Almost 79 percent of the dollar bonds sold in January by companies from Asia outside Japan lost money by the end of the month, from 1.3 percent a year earlier, according to data compiled by Bloomberg. That compares with 52 percent of new European deals and 46 percent in the U.S.
Bond buyers’ appetite for debt is stretched after companies sold $419.8 billion of debentures in all currencies, a record for the month, Bloomberg data show. About $2.6 trillion was added to the value of equities worldwide last month as confidence mounted that global economic growth is accelerating. Investors put almost three times more money into stock funds than debt in the period, according to EPFR Global.
“Fund managers might be getting more cautious because there’s a fair bit of indigestion and they’re also worried about the potential reversal of flows from credit to equities,” said Suanjin Tan, a Singapore-based fixed-income portfolio manager at BlackRock Inc., which oversees $3.8 trillion. “We’ve seen too much, too fast, both in terms of supply and rich valuations.”
Demand for company debt in the second half of last year pushed spreads close to the narrowest ever, squeezing potential returns for 2013. Investors sought refuge in the notes as central banks cut interest rates to record lows to boost growth and yields on the safest government debt dropped below zero.
The extra yield that fund managers demand to hold global company bonds instead of benchmark government debt fell to 1.42 percentage points on Jan. 10, from 2.36 percentage points on June 5. The spread has since widened to 1.48 percentage points as buyers start to sell, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index.
Stocks in the world’s developed countries, posted the best start to a year in two decades, with the MSCI World Index (MXWO) of equities in 24 markets rising 5 percent in January.
“The balance does seem like it’s swinging in favor of equities,” said Tai Hui, the Hong Kong-based chief market strategist for Asia at JPMorgan Asset Management Asia Inc. “A lot of investors are starting to think they need to take on more credit risk to generate the same return.”
Credit Risks Increase
Elsewhere in credit markets, a Federal Reserve survey shows U.S. banks expect credit quality to rise in 2013 after they eased standards on loans for autos and businesses of all sizes. A gauge of corporate credit risk in Europe rose to the highest level in eight weeks on renewed concern that the region’s sovereign crisis is worsening. Catalent Pharma Solutions Inc. is said to be seeking to decrease the rate it pays on two term loans.
The U.S. two-year interest-rate swap spread, a measure of debt market stress, rose 0.86 basis point to 16.86 basis points. The measure widens when investors seek the perceived safety of government securities and narrows when they favor assets such as corporate bonds.
The Markit CDX North American Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, climbed four basis points to a mid-price of 90.3 basis points, according to prices compiled by Bloomberg.
The Markit iTraxx Europe Index of 125 companies with investment-grade ratings dropped 1.5 to 116.5 at 9:50 a.m. in London. In the Asia-Pacific region, the Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan advanced two basis points to 118 basis points.
Spanish Premier Mariano Rajoy is facing opposition calls to resign amid contested reports about illegal payments, while Deutsche Bank AG said this year’s rally in Italian and Spanish bonds may falter as Italy’s Silvio Berlusconi narrowed the front-runner’s lead before elections this month.
The indexes typically rise as investor confidence deteriorates and fall as it improves. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Bonds of Goldman Sachs Group Inc. (GS) were the most actively traded dollar-denominated corporate securities by dealers, accounting for 3.7 percent of the volume of dealer trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Banks anticipate credit improvements in most major loan categories this year, the Fed said yesterday in its quarterly survey of senior loan officers.
Business lending standards were “eased somewhat for all firm sizes” and banks “again eased standards on auto loans,” the central bank said in its report. Standards for mortgages and credit card loans were little changed, the survey said.
Catalent is seeking to decrease the rate on a term deal maturing in 2017 to 325 basis points more than the London interbank offered rate, with a 1 percent floor on the benchmark, according to a person with knowledge of the transaction, who asked not to be identified because terms are private.
The Blackstone Group LP-controlled provider of development services to the pharmaceutical industry also is seeking to cut the rate on a loan due 2016 to 350 basis points more than Libor, with no floor on the benchmark, the person said.
In emerging markets, relative yields climbed 6 basis points to 275 basis points, or 2.75 percentage points, according to JPMorgan Chase & Co.’s EMBI Global index. The measure has widened from 265.8 at year-end.
Of the record $23.4 billion of dollar debt issued by firms from China and Indonesia to South Korea in January, $18.5 billion had dropped in value by the end of the month, according to prices compiled by Bloomberg. In the same period last year, about $150 million, or 1.3 percent, of the $11.9 billion of dollar notes sold in the region fell, the data show.
Bonds issued by Cheung Kong Holdings Ltd. (1), controlled by Li Ka-shing, Asia’s richest man, were the worst performers. The 5.375 percent notes, which were priced at par on Jan. 16, tumbled to 91.9 cents on the dollar as of Jan. 31, according to prices compiled by Bloomberg. Cheung Kong officials couldn’t be reached for comment on the bond trading.
In Asia excluding Japan, junk-rated securities lost less than investment-grade notes. Speculative-grade bonds in the region retreated 0.51 percent in January, compared with a loss of 0.53 percent for their higher-rated counterparts, according to JPMorgan Chase & Co.’s Asia Credit Index.
Asian high-yield notes also outperformed investment-grade debt last year, gaining 20.4 percent versus the 11.3 percent return on higher-rated bonds. Speculative-yield, or junk, bonds are rated lower than Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s.
Of the $107 billion of dollar debt issued by U.S. companies last month, about $49 billion fell by Jan. 31, data compiled by Bloomberg show. That’s more than 20 times higher than the declines a year ago, when $1.5 billion out of $73 billion of bonds fell.
In Europe, $14.9 billion of the $28.6 billion of dollar- denominated debt issued last month dropped by the end of January, the data show. A year earlier, $1.1 billion of $25.6 billion of bonds sold, or 4 percent, declined.
Mounting confidence in the global economy is likely to help stocks more than bonds, which have benefited from years of government stimulus. Equity funds attracted $18.7 billion in the week to Jan. 30, adding to talk of a “great rotation” from fixed income, Cambridge, Massachusetts-based EPFR Global said in an e-mailed statement on Feb. 1.
U.S. employers added 157,000 workers in January, following a revised 196,000 gain the month before and a 247,000 surge in November, the Labor Department said last week. In China, service industries grew at the fastest pace since August, while a report yesterday showed European investor confidence surged to the highest in more than 1 1/2 years.
“With roughly 50 new deals from which to choose, many investors just haven’t had the time to look at new credits and new structures,” said Mark Reade, a Hong Kong-based credit desk analyst at Credit Agricole CIB. “With U.S. data generally constructive” and “some early signs of a rotation into equities, the performance of credit has lagged.”