Worst Bond Rout In Decades Intensifies With UK Losing 27%
The worst bond selloff in decades is seeing few signs of ending, with UK notes losing a stunning 27% this year.
(Bloomberg) -- The worst bond selloff in decades is seeing few signs of ending, with UK notes losing a stunning 27% this year, as central banks battle to stamp out the strongest inflationary pressures in decades.
Already down more than 20% from its peak, the Bloomberg Global Aggregate Total Return Index of investment-grade government and corporate bonds dropped for an eighth session on Monday, the longest run since 2016. Inflation-linked debt has shed 29% in 2022.
The turmoil in financial markets that has also caused a selloff in stocks is deepening, and “bond vigilantes” are back, according to Ed Yardeni, a veteran economist credited with coining the term in the 1980s. In Asia, the yuan and the yen are tumbling, while speculators bet the pound will slide below $1, a level that was once virtually unthinkable.
“We are staying defensive, given the globally hawkish central banks, currency volatility -- or even crisis to some extent -- energy crisis and a dragging war,” said Victor Wong, a portfolio manager at BEA Union Investment Management Ltd.
Policy makers led by the Federal Reserve rapidly unwinding ultra-easy stances have unleashed the extended plunge in markets, especially with few signs of a shift in their aggressive postures.
The US benchmark 10-year Treasury yield held a level last seen in 2010. Boston Fed President Susan Collins and her Cleveland counterpart Loretta Mester said additional tightening is needed to rein in stubbornly high inflation.
In addition to stocks and bonds moving in tandem, “we may also have to get used to less intervention as policymakers will be more constrained as inflation is structurally stickier,” Deutsche Bank AG analysts including Jim Reid wrote in a note.
In Asia, the tumble in the currencies of the region’s two largest economies may swell into a full-fledged crisis if it spooks overseas funds into pulling out money. The cost of insuring the debt of several countries against default in the region has spiked this month.
Sheng Songcheng, a former People’s Bank of China official, warned the Fed’s policy was destabilizing global markets and hurting other economies.
Despite its real-estate crisis, which has led to insolvencies, China’s yuan debt is standout, with an index showing it up 3.7% this year.
The administration of Britain’s new Prime Minister Liz Truss has rolled out plans for large-scale tax cuts in the face of an economic slowdown. That’s caused a slump in the pound and a record stampede out of UK government bonds, with investors anticipating it will add to the government’s already sizable budget deficit.
As for the euro area, the issue of when the European Central Bank will reduce almost 5 trillion euros ($4.8 trillion) of bonds bought during recent crises is expected to be discussed at officials’ non-policy meeting in Cyprus on Oct. 5 and will likely also be debated at subsequent gatherings, people familiar with the matter told Bloomberg.
Elsewhere in credit markets:
Yield premiums on Asia ex-Japan high-grade credit rose for a third consecutive day as investors brace for recession risks.
- The UK bond market crash portends volatility for Asia dollar bonds, as governments across the developed world face a rising conundrums between inflation, fiscal and monetary policy, Timothy Tan, a strategist at Bloomberg Intelligence, wrote in a report.
- Credit spreads remain too low for the current macro risks in high-grade Asia while emerging-market risk could roil the junk bond market as Treasury yields rise, Tan said.
Companies that need to refinance bonds have never faced costs this high, as bonds across the spectrum fell.
- Creditors of Spanish steelmaker Celsa Group have submitted a restructuring plan that would see them take control of the company and reduce a 2.8 billion euro debt pile by almost half.
- Matalan Ltd. reached an agreement to extend a key bond maturity and start a sale process after months of negotiations with its creditors.
About five companies looking to sell new notes in the investment-grade primary market on Monday stood down due to volatility.
- Lumen announced a debt tender offer, according to a statement Monday
- US junk bond yields have risen to a more than two-year high across ratings
- CCCs, which are the riskiest and most growth-sensitive part of the market, are poised to end September with the biggest loss in three months.
- For deal updates, click here for the New Issue Monitor.
- For more, click here for the Credit Daybook Americas.
(Updates with detail, context, quotes throughout)
More stories like this are available on bloomberg.com
©2022 Bloomberg L.P.