Bubble Bursting in Less Than a Week for Payment-in-Kind Bonds

Is the Global Bond Market Rally Over?

Bonds that allow issuers to defer interest payments are nosediving less than a week after they were sold amid a sell-off of fixed-income assets.

Ardagh Group SA’s 845 million euros ($948 million) payment-in-kind toggle notes due September 2023 are indicated at 95.5 cents on the euro, down 4.5 cents from when the Luxembourg-headquartered packaging company sold them on Wednesday, according to data compiled by Bloomberg. German auto components maker Schaeffler AG’s 750 million euros of notes due September 2026 are quoted 97.2 cents down from a sale price of 100 cents on Thursday, the data show.

Both companies increased the size of their payment-in-kind note sales last week amid surging demand for higher-yielding assets, which pushed borrowing costs for junk-rated companies to a record low. Markets subsequently turned, starting with a tumble in longer-dated government bonds and spreading to other fixed-income assets, amid growing concern about the effectiveness of loose monetary policies from the U.S. to Europe.

“Investors who bought risky bonds such as PIKs in the bull market phase, have woken up to a bear market this week,” said Bill Blain, a strategist at brokerage Mint Partners in London. “The global experimentation with monetary policy is being shown as ineffective.”

Average yields on junk debt in euros dropped to an unprecedented low of 3.76 percent on Wednesday, down from 5.17 percent at the start of the year, according to Bloomberg Barclays indexes. The gauge rose to 3.83 percent on Friday.

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