Rout Extends to Corporate Bonds as Borrowing Costs Increase

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Corporate debt has been drawn into the global bond selloff as signs the euro-area economy is strengthening damps the allure of fixed-income securities.

The average yield on investment-grade bonds in the region has soared to the highest since August while that on junk bonds climbed to the most since January, according to Bank of America Merrill Lynch index data. Investors have lost 1.8 percent from high-grade notes this month, on track for the worst returns since November 2011, the data show.

The rout has wiped more than 400 billion euros ($452 billion) from Europe’s government bond markets since April and sent benchmark rates to the highest this year, driving up borrowing costs for the region’s corporates. Yields on German 10-year bonds climbed above 1 percent from a record-low 0.049 percent in the period.

“The rates selloff has been the catalyst for the weakening of credit too,” said Mark Holman, chief executive officer of TwentyFour Asset Management in London. “We are seeing far better economic conditions.”

The premium investors demand to hold investment-grade corporate notes in euros instead of government bonds is 1 percentage point, the most since January, Bank of America Merrill Lynch index data show. The spread is 3.88 percentage points for high-yield securities, the widest in a month.

Longer Maturities

Bonds with longer maturities are leading the selloff, with French utility GDF Suez SA’s 300 million euros of 100-year notes falling 2.4 cents on Wednesday to 135 cents on the euro, according to data compiled by Bloomberg. The bonds have fallen 19 cents this month.

The cost of insuring investment-grade corporate bonds against losses is at 68.5 basis points after reaching 69.4 on Tuesday, the highest since Oct. 20. Higher yields and price swings deterred borrowers last month as companies issued 73.7 billion euros of notes, down 14 percent from May last year, data compiled by Bloomberg show.

Data indicating the euro-area recovery is gathering pace is dispelling deflationary concerns that prompted the European Central Bank to embark on an unprecedented stimulus program. The prospect of rising prices eroding the value of payments on bonds amplified the selloff, reducing the market value of securities in the Bloomberg Eurozone Sovereign Bond Index to 5.6 trillion euros from more than 6 trillion euros in April.

Greek Woes

Concern that Greece’s funding woes will plunge the currency bloc into another financial crisis, and a glut of euro-denominated corporate issuance this year, especially a surge in borrowing from U.S. companies, may also be deterring investors from buying corporate debt.

Increased borrowing costs have “been driven by the movements in bunds rather than credit spreads, but the market definitely feels weaker,” said Zoso Davies, a credit strategist at Barclays Plc in London. “I wouldn’t be surprised if we see further widening in spreads over the next few weeks, particularly if supply from the U.S. keeps coming.”

Borrowers have raised 503 billion euros this year, up from 483 billion euros in the same period in 2014, with issuance from U.S. companies reaching the highest since at least 2009 at 67 billion euros. Companies from Intel Corp., the world’s largest chipmaker, to U.K. fashion chain New Look are also planning deals, according to people familiar with the matters.

“The new issue pipeline looks very healthy and investors are nervous that the market may not be able to absorb all that paper,” said Juan Esteban Valencia, a credit strategist at Societe Generale SA in Paris. “High levels of sustained issuance could send spreads wider and yields higher.”

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