Corporate bonds in Europe suffer the biggest fall since the start of the pandemic
Corporate bonds in Europe suffered their biggest hit since 2020 over the past week after a sudden pivot by the European Central Bank towards tougher policy rekindled concerns about the region’s economic health.
“The ECB’s unexpectedly hawkish stance was a trigger for a selloff,” said Vincent Benguigui, credit portfolio manager at Federated Hermes.
Euro-denominated investment-grade bonds fell 1.9% over the past week on a total return basis, the most since June 2020, according to an ICE BofA index. High-yield bonds fell 2% in their weakest week since the start of the pandemic.
In a sign that the easy money of the pandemic era is coming to an end, or at least taking a break, the selloff pushed the yield of a junk-rated euro-denominated bond index above the average coupon rate for the first time since November 2020. means riskier companies will generally have to pay more on newly issued debt than they pay on existing bonds.
Bankers who specialize in helping European companies borrow say the ECB’s change in tone has added at least a percentage point to yields on any new bond for sale by a speculative-rated company.
Market volatility prompted some companies to quickly change plans. This week, Cerved Group SpA,
an Italian subsidiary of fintech company ION Group, switched from selling fixed-rate bonds to floating-rate bonds, which did not come under the same selling pressure.
ECB President Christine Lagarde opened the door to an interest rate hike this year at a press conference last week, marking a key change for a central bank that has kept its key rate steady at minus 0.5% since September 2019. If implemented, it would be the first increase since 2011.
This change catalyzed a sell-off in government and corporate bonds. Heavily indebted southern European countries and the most fragile economies have been hardest hit, raising fears that weaker eurozone governments and businesses will see their recovery hampered by the rising cost of the debt.
“Debt levels have increased significantly in some eurozone economies,” said Bert Colijn, eurozone economist at ING. “That is clearly the story currently being valued in bond markets.”
Market reaction in Europe has been extreme because the ECB’s turn has been more sudden, according to Stephen Caprio, head of European credit strategy at BNP Paribas. This contrasts with the United States, where the Federal Reserve has announced a stricter policy to fight inflation for several months.
Investors were complacent, Mr. Caprio said. “The reaction can be quite quick when the regime changes.”
The spread between the Italian 10-year bond yield and the German benchmark widened to 1.6 percentage points, the highest since July 2020. The Greek equivalent jumped to 2.1 points, the highest since May this year.
Some of the pain of selling reversed on Wednesday after France’s representative on the ECB board said the market had overinterpreted the central bank’s tightening signals. On Thursday, stronger-than-expected US inflation data pushed yields higher around the world, including in Europe.
Corporate debt typically uses government bond yields as a benchmark. The yield of an investment grade bond index hit a 21-month high this week, hitting 1.2%. For a speculative-grade bond index, the yield hit its highest level in 15 months at 4.1%.
The sell-off was most acute for certain risky debts. The yield on a 2030 bond issued by Italian road operator Autostrade per l’Italia jumped to 2.7% from 1.5% at the end of last year.
Bonds issued by southern European banks also fell. The yield on 10-year debt issued by UniCredit SpA reached 0.8% this week, more than double that at the end of 2021. For Mediobanca Banca di Credito Finanziario SpA,
another Italian bank, the yield on a bond maturing in 2027 jumped to 1.52%, adding nearly a full percentage point in the same time frame.
Hiring-related borrowing costs could lead to lower emissions. European high-yield issuance hit a record high last year as companies tapped the market heavily to take advantage of historically low borrowing costs, Dealogic data showed.
Write to Anna Hirtenstein at [email protected]
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