viernes, 24 de julio de 2015

viernes, julio 24, 2015

Corporate Bonds Face Tougher Times

Corporate debt has turned into a losing bet for investors this year

By Richard Barley

Updated July 20, 2015 2:43 p.m. ET

A pedestrian walks by a CVS store on June 15, 2015 in San Francisco, California. A pedestrian walks by a CVS store on June 15, 2015 in San Francisco, California. Photo: Getty Images

Corporate bond investors have been pampered since the global financial crisis. Slow growth and conservative balance sheets have boosted the allure of company debt, generating strong returns. But so far, 2015 has been less kind; the outlook is uninspiring too.

European and U.S. corporate bonds are down 0.8-0.9% year-to-date, according to Barclays indexes. Some of that is down to the recent sharp reversal in government bond markets, but there has been an extra blow on top: the gap between company and underlying government bond yields has widened since the start of the year too, to 1.15 percentage points in Europe and 1.48 in the U.S.


True, that means that yields are now a little juicier, at 3.4% in the U.S. and 1.3% in Europe.

The search for yield and extremely low default rates mean the corporate bond market isn't at risk of collapsing soon.

But neither is it particularly set to shine. Issuers are busy taking advantage of good borrowing conditions, weighing on prices. In Europe, net supply of corporate bonds has turned positive for the first time since 2010, BNP Paribas notes: U.S. companies have been particularly busy, raising long-dated debt at startlingly low yields. That is a trend that may continue. In the U.S., the past two weeks has seen over $80 billion of investment-grade issuance, Société Générale SCGLY -0.51 % notes, and the pipeline may be busy as companies look to raise funding before the focus turns more to the U.S. Federal Reserve and the risk of rate rises.

Corporate balance sheets look more at risk. The second quarter saw global M&A hit $1.29 trillion, its highest tally in eight years, with a record $640 billion recorded in the U.S., according to Dealogic. Companies are proving willing to finance deals with debt: for a recent example, take CVS Health’s purchases of Omnicare and Target’s pharmacies and clinics businesses. The trend isn’t so far advanced in Europe, but could yet accelerate.

Meanwhile, fund flows have favored equities more. In May and June, Europeans pulled €8.7 billion ($9.4 billion) from high-grade bond funds, more than half the inflows in the previous four months, data from J.P. Morgan shows. Overall, fixed-income flows have turned almost as negative as in the taper tantrum of 2013, Bank of America Merrill Lynch notes.

There are also increasingly high-profile concerns about liquidity in corporate bond markets.

While illiquidity can boost investor returns in a rally—as the lack of available paper leads to
exaggerated rises in price—it will have a similar amplifying effect in a selloff. Over time, corporate bond yields should price in a higher structural premium for liquidity.

Greece and China are no longer scaring investors, meaning some might be tempted back into the market. But potential gains are limited at best, and if investors start to think in earnest about U.S. rate rises, any respite could be short-lived. The best days for corporate bonds are in the past.

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