War Risks Slow Company Bond Sales to Least Since July ’13Benjamin Purvis
Risks from conflicts in the Middle East and Ukraine are combining with concerns credit markets may have become too frothy to curb corporate bond sales.
Just $53.6 billion of notes were sold globally in the first eight days of August, data compiled by Bloomberg show. That’s the slowest start to a month since July 2013 after then Federal Reserve Chairman Ben S. Bernanke discussed a timetable for scaling back central bank stimulus, spurring investors to sell riskier assets in an episode dubbed the taper tantrum.
Political turmoil involving Russia, Gaza and Iraq has pushed money managers toward safer assets at a time of year when sales are historically subdued. The Fed, which has dialed back quantitative easing, warned last month about signs of excess in credit. Global stocks ended last week 3.9 percent below their July peak, credit spreads touched the most since March and Treasury yields dropped to a 13-month low after the U.S. authorized air strikes in Iraq.
“Geopolitical risks are definitely damping corporate bond sales globally,” said David Lai, an investment director in Singapore at Eastspring Investments, which manages about $105 billion. “Ukraine, Gaza and Iraq are evolving events so it increases the uncertainty. But on top of that, August is typically a quieter month for issuance.”
The average yield spread over Treasuries for global corporate and speculative-grade bonds climbed to 178 basis points on Aug. 8, 22 basis points above a June low and the widest since March 18, according to a Bank of America Merrill Lynch index.
The benchmark 10-year Treasury note’s yield declined seven basis points, or 0.07 percentage point, last week to 2.42 percent, according to Bloomberg Bond Trader prices. The yield slid to 2.35 percent Aug. 8, the lowest since June 2013.
“Valuations had become quite stretched in specific parts of the credit market like high yield, so to some extent it’s a healthy correction and takes a little bit of the froth out of markets,” said David Carruthers, a Sydney-based money manager at AMP Capital Investors Ltd., which oversees the equivalent of $44 billion in fixed-income assets.
The economic fallout from fighting in Ukraine and the shooting down of a Malaysia passenger jet is increasing after the U.S. and Europe stepped up sanctions against Russia and Vladimir Putin’s government responded with a ban on food imports from a number of countries.
Outflows from high-yield debt are also reducing support for corporate debentures, with U.S. junk-bond funds reporting an unprecedented $7.1 billion of withdrawals in the week ended Aug. 6, according to data provider Lipper.
“The northern summer can also exacerbate volatility because liquidity tends to be lower, so weaker news flow can have more of an impact, whether it’s the Fed, flow related, geopolitical or something else,” Carruthers said Aug. 8.
The first eight days of last month, which included the July 4 public holiday in the U.S., saw $75.8 billion of note sales globally, Bloomberg-compiled data show. That compares with $36.6 billion the same period last year and $62.6 billion in the first eight days of August 2013.
“There’s been a combination of factors including that people are away, a sense that valuations have become a bit tight and that geopolitical risk is rising,” said Stuart Stanley, who helps oversee about $3.1 billion in high-yield credit as a fund manager at Invesco Asset Management in London. “You get a short-term herd movement that starts with the fast money seeing weakness in the market and pulling out and then other people follow suit.”
Stanley said he expects high-yield issuance in Europe will remain subdued until September.
European companies issued $13.8 billion of high-yield bonds in dollars, euros and pounds in July, making it the slowest month for sales of speculative-grade securities in the region since February, Bloomberg-compiled data show. Offerings so far this month have slumped to $1.7 billion, meaning issuance for August may be less than $7 billion if the same pace is maintained.
In the Asia-Pacific region outside Japan, just eight bonds denominated in either dollars, euros or yen totaling $2.6 billion were sold in the first eight days of this month, versus $7.9 billion the same period of July. Export-Import Bank of Korea, or Kexim, led issuance, raising $500 million of five-year notes and the same amount of 12-year bonds.
“We’re still going to have issuance, but maybe there will be higher premiums, wider spreads and lower volumes if volatility increases,” Paul White, the head of global debt syndicate at Australia & New Zealand Banking Group Ltd., said Aug. 8. “September is usually the most active month globally after January for issuance, so next month will be the real test of supply, particularly for high-yield and emerging-market bonds which tend to get more heavily impacted by these sorts of situations.”