High-Grade Bonds Post First Weekly Loss of the Year in Europe

Bonds with the longest maturities led the first weekly loss since December for investment-grade debt in Europe after the Federal Reserve signaled interest rates may rise sooner than anticipated.

High-grade notes in euros forfeited an average 0.3 percent, with securities due in more than 10 years posting negative returns of 0.8 percent, according to Bloomberg bond index data. Average yields on the debt climbed six basis points to 1.74 percent, the biggest increase since the week ending Dec. 6.

Global investors are preparing for an end to an era of cheap money after Fed Chair Janet Yellen signaled this week that benchmark rates may rise as soon as next year. Government bonds in the U.S. and Europe retreated as the central bank’s officials predicted their target interest rate would be 1 percent at the end of 2015 and 2.25 percent a year later, higher than previously forecast.

“The potential for significant returns in investment-grade bonds in the rest of the year is limited,” said Richard Klijnstra, the head of credit at Kempen Capital Management NV in Amsterdam, which has about $2.2 billion of credit assets under management.

Government bonds slid the day after Yellen spoke on March 19, with Germany’s 10-year yield jumping five basis points to 1.65 percent, the biggest increase since Feb. 28. Britain’s 10-year yield rose seven basis points to 2.77 percent.

Volkswagen AG’s 850 million euros ($1.2 billion) of bonds maturing in 2033 lost 1 percent this week, Bloomberg bond index data show, while Microsoft Corp.’s 1.75 billion euros of notes due 2028 forfeited 1.1 percent, Bloomberg index data show.

Junk Bonds

In credit markets today, Abengoa SA (ABG), the Spanish developer of solar-thermal plants, is marketing 500 million euros of high-yield bonds maturing in seven years, according to a person familiar with the matter. The notes, which will be priced to yield about 6 percent to 6.25 percent, may be rated B2 by Moody’s Investors Service, five steps below investment grade.

The average yield investors demand to hold speculative-grade debt in euros dropped eight basis points this week to 3.52 percent, four basis points from a record low reached March 10, according to Bloomberg bond index data. The bonds handed investors an average return of 0.2 percent this week, the data show.

To contact the reporter on this story: Alastair Marsh in London at amarsh25@bloomberg.net

To contact the editors responsible for this story: Shelley Smith at ssmith118@bloomberg.net Jennifer Joan Lee

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