Losses Stalk Bond Investors in August as Europe’s Economy Grows

Corporate bondholders in Europe forfeited 0.2 percent in August, the fourth month of losses in a year that’s poised to generate the worst returns since 2008.

Investment-grade debt in euros is returning 0.8 percent so far this year compared with 9 percent in the same period of 2012, Bank of America Merrill Lynch index data show. Average yields on the securities jumped nine basis points this month to 2.04 percent, near the highest in seven weeks, while yields on junk-rated bonds climbed 14 basis points to 4.9 percent, according to Bloomberg index data.

The corporate debt market is being hurt by speculation that accelerating economic growth will undermine the pledges of European Central Bank President Mario Draghi and Bank of England Governor Mark Carney to maintain interest rates at record lows for an extended period. The euro-area economy grew 0.3 percent in the three months through June, ending six quarters of contraction, while the region’s services expanded for the first time in 19 months in August.

“As it looks as though we’re finally exiting the economic slump, rates have risen, weighing on total returns,” said Harpreet Parhar, a credit strategist at Credit Agricole SA (ACA) in London. “European economic data has been coming in much better than expected which makes it harder for Draghi and Carney to talk down rates.”

Markets are also being roiled by the prospect of the Federal Reserve slowing $85 billion of monthly asset purchases. U.S. corporate bonds lost 0.8 percent this month as traders anticipate a reduction in monetary easing to begin as soon as September.

Military Action

“Markets are a bit weaker this month,” said Alain van der Heijden, a fund manager at Kempen Capital Management in Amsterdam, which oversees 1.4 billion euros ($1.8 billion) in corporate bonds. “There’s fear the Fed will cut stimulus, while improving economic data in Europe is having a further upward effect on yields.”

The possibility of the U.S. taking military action against Syria, along with German elections on Sept. 22 in which Chancellor Angela Merkel will defend her coalition’s majority, are also weighing on credit markets.

The cost of insuring corporate bonds against losses increased this month, with the Markit iTraxx Europe Index of credit-default swaps on 125 companies with investment-grade ratings climbing 7 basis points to 107, the biggest increase since June. The Markit iTraxx Crossover Index of 50 companies with mostly speculative-grade ratings jumped 26 basis points to 430 basis points, near the highest in seven weeks.

Corporate Issuance

A basis point on a credit-default swap protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

Companies sold 43.4 billion euros of bonds this month, the least since December and 16 percent down on last August, data compiled by Bloomberg show. This week, issuance rose to 16.9 billion euros, the most in seven weeks, including deals from Orange SA (ORA), France’s largest phone company, and Volkswagen AG (VOW), Europe’s biggest automaker.

To contact the reporter on this story: Katie Linsell in Madrid at klinsell@bloomberg.net

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net

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