Credit Investors Lose Money Like It’s 2018 on Duration Risk
(Bloomberg) -- The corporate world’s zeal for selling long-dated debt is hitting bondholders as long-feared interest rate risks finally break out.
Bonds with at least 10 years left to maturity have produced losses of around 3.2%, the worst start to a year since 2018 and more than twice the broader credit market’s decline, according to Bloomberg Barclays indexes. In the euro market, long bonds have fallen 0.8% in total-return terms against a broadly stable market.
As issuers rush to borrow for longer and the reflation trade guides yields higher, those losses may mount. Medical devices producer Becton Dickinson and Co. sold a 15-year euro-denominated note Tuesday, on the heels of long-maturity sales from the likes of Apple Inc. and Bayer AG since the start of the year.
And it’s all happening as duration, a measure of price sensitivity to rates, hovers near a record in global credit.
“Long dated credit remains at risk from a total return perspective,” said Mohammed Kazmi, a portfolio manager at Union Bancaire Privee, which oversees 147.4 billion Swiss francs ($165 billion).
The economic recovery that’s spurring yields and inflation expectations higher is exposing the challenges of investing in bonds as maturities get longer and coupons ever-smaller.
As investors bet on massive U.S. fiscal stimulus and the vaccine rollout, yields on U.S. government bonds are on the way up, with 30-year yields breaching the psychological barrier of 2% this week. Even German bund benchmarks are trading at their least-negative yields since September.
To get a sense of how that weighs on corporate debt investments, every one percentage point increase in yields translates to an average loss of 7.3% on a portfolio of global credit, based on data compiled by Bloomberg.
The U.S. has been leading the jump in duration, with sensitivity to rates jumping more than 20% since the end of 2018 and currently hovering near its highest level since the late 1970s, according to Bloomberg Barclays indexes. In the euro credit market, duration remains near its highest level in three years.
“People do worry about what happens in this high-duration segment if rates sell off,” said Michal Jezek, a credit strategist at Deutsche Bank AG.
Long-dated corporate bonds in euros are already more vulnerable to a pullback in demand than in the dollar and pound markets where pension funds and insurers have been able to allocate a larger chunk of their investments to non-government debt.
For now, buyers are still lapping up longer-term debt as yields on shorter-dated notes evaporate. It’s a trend ABN Amro Bank NV strategist Shanawaz Bhimji expects will be kept alive as ultra-loose central bank policy saps yields and forces investors into riskier realms to generate returns.
Investment-grade rated companies sold almost $420 billion of debt due in 20 years or more last year, more than double the previous decade’s average. They have sold more than $30 billion already in 2021. In Europe, supply of 10-year bonds or longer stood 40% above the previous decade’s average.
After a decade of borrowers pricing ever-more aggressive deals to an acquiescent investor base, any pushback may be some way off.
Still, the prospects that government bond yields continue to their upward climb has Kamil Amin, a strategist at UBS Group AG, telling his clients to take precautions. He prefers corporate bonds with three to seven years left to maturity. Analysts at the Swiss bank expect 10-year German yields to end the year at minus 0.25% from minus 0.44% currently.
“The reflation trade has legs,” said Amin. The “long end will continue to underperform.”
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