Markets

Marcus Ashworth is a Bloomberg Gadfly columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

That has been a tough lead-up to Halloween for long ends of major sovereign bond markets in Europe. The fallout in the corporate bond market is on its way -- and the window for issuing new debt could soon close. 

The current government bond rout seemed pegged to the surprisingly strong U.K. growth data published Thursday. The Bank of England was the great cheerleader for one last round of pump-priming, and now that's no longer needed. So much for central bank bond purchases. The change in sentiment hasn't shown up at a broad level in the European credit market, but it should.

Flat as a Pancake
European investment-grade corporate bond spreads haven't budged in weeks, and they're due.
Source: Bloomberg

But to be honest, the backdrop's been worsening for a while. Fears that the monetary road is running out have heightened expectations that the baton is being passed to fiscal expansion -- infrastructure projects are all the rage. That suggests greater government debt issuance, and more supply points to higher yields.

Inflation's also on the way, and U.S. GDP figures due Friday should cement the picture of improving data across major economies. Whispers from Saudi Arabia and the Gulf Cooperation Council to cut oil production by about 4 percent adds to the sense that crude, and consumer prices, are headed higher. And let's not forget central banks' near-ceaseless demands for curve steepening. 

It now seems that the biggest bubble in town is bursting. 

Bad Day for Bunds
Europe's corporate benchmark sold off Thursday as investors lost faith in continued central bank stimulus.
Source: Bloomberg

For companies looking to raise money, the benchmarks for pricing their issues are now a moving target. Any liquidity or price problem in the fixed income market translates into a violent reaction that puts everyone off until the dust settles. It's a matter of paying up with a much wider spread, or staying out of the market entirely, and the latter is far more likely.

A look at British American Tobacco's issue from early last month shows the pain is particularly acute at the long end. 

Choking
British American Tobacco's brand-new bond is down 17% since it was issued, a bad sign for other companies looking to issue at the long end
Source: Bloomberg

The third-busiest week for new company issues this year has seen Daimler and Danone successfully complete new deals, and it now seems they've done so in the nick of time. Bayer's got one coming, and it will be worth watching if the company's going to have to pay a bit more, or decide to delay until the broader market settles. The party's over, at least for now. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Marcus Ashworth in London at mashworth4@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net