Junk Bonds Snap Seven-Week Winning Streak in Europe on Tapering
Junk (BEUH) debt investors lost money for the first time since June in Europe this week as bondholders anticipate the Federal Reserve slowing stimulus.
High-yield notes from companies including Italian carmaker Fiat SpA and Portugal Telecom SGPS SA, the country’s biggest telecommunications company, lost investors an average 0.3 percent over the period, paring a 2.6 percent gain in the longest winning streak since Jan. 11, according to Bloomberg bond index data. Investment-grade (BERC) bonds also forfeited 0.3 percent, a second week of losses.
Global markets were roiled as speculation the Fed will ease stimulus triggered a sell-off in emerging market securities amid concern global borrowing costs may increase. The MSCI Emerging Markets Index dropped 3 percent, the most in two months for the equity benchmark, while the average yield investors demand to hold European junk debt climbed 17 basis points to 4.85 percent, Bloomberg data show.
“Concern about tapering and weakness in several emerging markets has sparked a rise in interest rate volatility,” said Rik Den Hartog, a portfolio manager at Kempen Capital Management in Amsterdam. “This has caused some selling in credit markets.”
Nokia Oyj (NOK1V)’s $1 billion of bonds due May 2019 fell to the lowest since July 8 after the phone maker was downgraded by Moody’s Investors Service. The Espoo, Finland-based company’s debt was cut one level to B1, four levels below investment grade, with a negative outlook on concern it will have difficulty generating profits in its core operations.
A total of 11 billion euros ($14.7 billion) of bonds was sold in Europe this week, below the average of 14.1 billion euros for 2013, with Svenska Handelsbanken AB (SCAB), Sweden’s second-largest bank, and UniCredit SpA (UCG), Italy’s biggest lender, were among leading issuers, Bloomberg data show.
The average yield for European investment grade notes rose four basis points this week to 2.06 percent, the highest since July 5.
In derivatives markets today, the cost of insuring corporate debt fell with the Markit iTraxx Crossover Index of credit-default swaps linked to 50 high-yield companies dropping 3.6 basis points to 416 basis points.
The Markit iTraxx Europe Index of swaps on 125 companies with investment-grade ratings declined one basis point to 101.8 basis points, paring three weeks of gains.
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.
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