Bond bulls gain $2.8 trillion this month after rebound

Bond bulls gain $2.8 trillion this month after rebound

(Bloomberg) – Global bonds rebounded in November, adding a record market value of $2.8 trillion, as investors bet central banks are keeping inflation under control. But how long the party lasts is another matter.

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Investment-grade government and corporate debt rose to a market value of $59.2 trillion from $56.4 trillion at the end of October, the largest monthly increase in a Bloomberg index dating back to 1990. The gauge – which fell into a bear market in September – rebounded after US inflation cooled more than expected and the Federal Reserve signaled a possible slowdown in aggressive rate hikes, boosting sentiment. .

“We are starting to see a number of economic indicators that indicate inflation has peaked or is peaking,” said Omar Slim, fixed income portfolio manager at PineBridge Investments in Singapore. While trading in US Treasuries is likely to be volatile amid economic data and Fed rhetoric, the bond market rally “has legs,” he said.

Expectations of a Fed pivot have risen since weaker inflation data earlier this month spurred a massive relief rally across all asset classes, reigniting a languid bond market in its worst rout since a generation. But with the threat of recession looming, a recovery will not be smooth.

Goldman Sachs Group Inc. strategists expect U.S. and European corporate bond spreads – which have recently narrowed – to widen in the first quarter of 2023 as central banks continue to hike rates, before tightening again as a soft landing for the US economy becomes more clear. They see US investment grade corporate bond spreads peaking at 180 basis points and ending the year at 150 basis points.

For 2023, “we expect small but positive excess returns, while total returns will likely show a much more pronounced improvement in performance” following the historic plunge in bond prices this year, the bank’s strategists wrote, including Lotfi Karoui, in a note this week. .

In Europe, investors are also betting on a better year, with spreads falling sharply lately. Euro-denominated corporate bond yield premia have tightened for six straight weeks and are now flirting with their lowest level in six months on optimism that rate hikes will slow and amid a run investors to capture some of the highest returns in a decade.

Safer corporate debt in the common currency has become a major trading idea for next year, with strategists at UBS Group AG forecasting better returns from the asset class than from European stocks or US bonds. German state.

And in Asia, high-quality dollar credit spreads have widened less than their US counterparts this year. Some in the region – including PineBridge’s Slim – believe that the region’s higher-rated credits, such as sovereigns or quasi-sovereign entities like utilities, could be an opportunity in 2023, given their stable fundamentals. .

Stronger growth in Asia, lax central bank policy in China and Japan, and a sharp drop in dollar issuance in the region are all supportive of credit, although investors should be selective, he said.

But not all investors are convinced that the recent gains mark a lasting turnaround.

Nicholas Elfner, co-head of research at Breckinridge Capital Advisors, is less optimistic about the possibility of the United States avoiding a recession. He’s been keeping an eye on the shape of the yield curve and its inverted front end, which suggests investors are anticipating a significant slowdown and Fed policy is likely a bit too tight, he said.

High-quality credit spreads tend to historically peak around 175 to 200 basis points in a mild recession and between 200 and 250 basis points in a full-blown recession, Elfner said. While rate volatility may have peaked, credit spreads have not if the economic scenario suggested by the yield curve materializes, he said.

But even if credit spreads widen in 2023, a near tripling of global investment grade corporate bond yields over the past 12 months gives investors a much bigger cushion to absorb such a move.

A crucial data point will come in mid-December, with the Fed’s final announcement of the year. Key data on payrolls and inflation will be watched in the meantime for clues on the central bank’s path forward and its implications for the bond market recovery.

“This bull cycle is going to last longer than expected,” said Steven Boothe, portfolio manager and head of the investment-grade fixed income team at T. Rowe Price Group Inc.

And as for the November rebound: “The market was a bit overhedged so it didn’t really take a lot of relatively good news to get that rebound,” Boothe said. “I wouldn’t expect it to persist.”

Elsewhere in credit markets:


Three issuers called on the European primary bond market on Wednesday to raise at least 1.6 billion euros. Among them is Electricité de France with a hybrid debt offer, with initial price discussions around 8.25%.

  • Atalian bonds extended losses after delayed takeover by private equity group; the two parties have agreed to extend the exercise period of a put option until December 16

  • The UK is set to ease bank ring-fencing rules as part of a deregulation drive for the City of London

  • Swedish landlord SBB sells nearly $1 billion worth of properties to reduce debt, underscoring sector’s struggles; On Tuesday, real estate group Aroundtown decided to skip the call for a hybrid bond, citing the high cost of issuing a replacement bond


Dollar bond transactions in Asia were sparse on Wednesday, with only one notable issuer from China mandating a new offering, reflecting greater caution in the market ahead of a key speech by Fed Chairman Jerome Powell later in the day.

  • Kasikornbank, a Thai commercial lender, will offer new yen- and US-dollar-denominated sustainability bonds to domestic institutional investors next month, according to a regulatory filing.

  • Cash-strapped Chinese property developers are poised for the first major test of investor demand after policymakers lifted restrictions on sales of local stock builder Shimao Group Holdings Ltd. planning to sell up to 30% of the share capital of a key listed company in China. unity

  • An Australian court has rejected a request by two Greylag Goose rental entities to wind up PT Garuda Indonesia in insolvency, according to a November 28 ruling.

  • Spreads on investment-grade dollar bonds in Asia ex-Japan narrowed by at least 2 basis points on Wednesday, credit traders said. They had already tightened this week to the lowest since early October, according to a Bloomberg index

Americas Inc. sold $8.25 billion of investment-grade bonds before any potential increase in inflation concerns curtailed investors’ appetite for highly rated debt.

  • El Salvador’s government is again offering to buy back some of its outstanding dollar bonds, a move that could help appease investors wary of the country’s ability to avoid a default in years to come.

  • U.S. junk bonds are on course for a second month of gains this quarter and only the fourth for this year, after easing inflation data earlier in the month and a string of comments from Fed officials that it was time to consider slowing the pace of interest rates. hikes

  • For deals updates, click here for the New Issue Monitor

  • To learn more, click here for Credit Daybook Americas

–With help from Lorretta Chen.

(Updated headings.)

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