Europe’s Credit Boom Has Handed Investors Worst Losses Since ’06Sally Bakewell
Record-low yields drew Berkshire Hathaway Inc., BlackRock Inc. and overseas borrowers to Europe’s bond market in their droves. The trend hasn’t worked well for investors who are suffering their worst losses in nine years.
Europe became fundraising turf for issuers from China to Brazil as the European Central Bank’s 1.1 trillion-euro ($1.23 trillion) quantitative-easing program pushed down borrowing costs. U.S. companies, including McDonald’s Corp. and Coca-Cola Co., led the surge, raising more money through euro-denominated bond sales this year than for the whole of 2014.
Investors, meanwhile, have lost out and were saddled with negative returns as the region’s benchmark bonds fell the most in three years. The rout wiped $640 billion from world debt markets.
“QE has both been a big positive and a big negative,” said Luke Hickmore, senior investment manager at Aberdeen Asset Management Plc in Edinburgh, which has 331 billion pounds ($521 billion) under management. “You get pushed to the extremes of value with these extraordinary measures from central banks.”
U.S. companies excluding banks sold 69.8 billion euros of bonds this year, including debut deals from Kinder Morgan Inc. and Blackstone Group LP, according to data compiled by Bloomberg. That surpasses the 68.9 billion euros sold in all of last year, which was a record in data compiled by Bloomberg that go back to 2009.
First-time euro issuers included billionaire Warren Buffett’s Berkshire, which sold 3 billion euros of bonds and BlackRock, the world’s biggest money manager, which raised 700 million euros. Other debutants included China’s Beijing Enterprises Holdings Ltd. and processed-food maker BRF SA from Brazil.
Those deals helped put 2015 on course to be the first since 2009 in which investment-grade euro bond sales exceeded redemptions, according to JPMorgan Chase & Co. data. Sales outstripped maturing deals by 75 billion euros as of June 1, compared with the same period last year when supply fell short by 54 billion euros.
“The ECB came and it was incredible,” Marc Baigneres, Paris-based head of investment-grade debt capital markets for Europe, the Middle East and Africa at JPMorgan, said. “The coupons were so attractive that even companies with no need for money came to the market.”
While companies got their hands on cheap cash, the picture was different for investors. They have seen returns fall as signs of an improving euro-area economy increased inflationary pressures and triggered a selloff in sovereign bonds.
Notes sold by Berkshire are among the worst-performing securities issued in the single currency this year, data compiled by Bloomberg show. Its 1 billion euros of 1.625 percent March 2035 bonds dropped to 82.6 cents on the euro from 99.6 cents at issue, sending yields up to 2.8 percent from 1.6 percent, the data show.
Corporate bond rates near historic lows continue to lure companies, with Intel Corp. and Danaher Corp. planning sales, according to people familiar with the matters.
The issuance is “a good thing for the investor because it provides a broader more diversified pool of companies,” said Eve Tournier, head of European credit portfolio management at Pacific Investment Management Co., which has $1.59 trillion under management.
Losses were amplified among bonds with longer maturity dates, which are more sensitive to the prospects for longer-term inflation or increases in benchmark rates.
“The main risk is being exposed to interest rates, not credit-default risk,” JPMorgan’s Baigneres said. “Interest rates are the driver of volatility so investors want to go to assets that are less exposed to that rate movement.”
Securities of higher-rated companies, whose yields are closer to benchmark rates than riskier securities, handed investors a 1.37 percent loss this year, the worst for the period since 2006, according to Bank of America Merrill Lynch index data.
Some $2.2 billion was pulled from high-grade credit funds in the week ending June 17, the biggest outflow since June 2013, according to Bank of America. For the week ending June 24, investors yanked $1.9 billion, the bank said today in a separate report.
“Some of the larger deals brought by U.S. companies in euros have tended to underperform,” said Pimco’s Tournier. “Some investors may have bought a little bit too richly.”
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