(Bloomberg) — In today’s tough credit world, riskier bonds are outperforming safer ones in times of volatility. the reason? An increasing focus on interest income, or holdings in industry parlance.
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Stronger inflows into credit funds have squeezed spreads – a premium for buying corporate debt over safer government bonds – so further tightening seems unlikely. That means money managers are looking for other ways to beat their benchmarks. Lower-rated and smaller bonds are becoming more attractive because the higher coupons they usually pay help offset falling values when yields rise.
The trend has been so strong that high-yield securities fell less than their blue-chip counterparts during the bond sell-off earlier this month, even though the companies that issue them are more vulnerable. A similar story is playing out with the underlying securities, which have performed strongly by comparing investment returns to risk, known as the Sharpe ratio.
“This reinforces the view that this is the flavor of the year. The lowest risk assets” – sovereign bonds – “are very volatile and have recently achieved the best Sharpe ratio in things like CoCos,” said Ninety One portfolio manager Darpan Harer. CoCos, short for contingent convertibles, are a type of subordinated note issued by banks.
Risky bonds are what investors often call high-beta instruments: they earn more in good times but lose more in bear markets. What stands out at this point is that fiscal deficit concerns are making government bonds attractive, while various interest rate paths are likely to reduce expected yields as policy rates fall in an uncertain pattern.
“People are starting to realize that credit spreads are not the variable part, the variable part is the risk-free rate. At HSBC Holdings Pvt.
Short stay
Another reason is that high-yield bonds have shorter maturities than senior notes, making prices more vulnerable to yield fluctuations. A global junk bond measure compiled by Bloomberg takes about half the time of its investment-grade counterpart, meaning a one-percentage-point increase in yields can double the rate of declines in safe-haven bonds.
Although the U.S. Federal Reserve was caught in a recent sell-off on concerns that there is little reason to cut interest rates, the sector’s biggest loss for the year to Thursday was 0.57%, according to data compiled by Bloomberg. It shows. For high-grade bonds, it was nearly triple and — unlike junk bonds’ strong rebound — they failed to break even for the year.
Similarly, most senior bonds issued by European banks are generally Tier 1 bonds, the riskiest type of bank debt, and remain in the red.
Still, questions about reinstating costs are bound to pop up with more notes coming in at relatively low risk premiums.
Per Wehrmann, high yield portfolio manager at DWS Group, said: “You have to be careful to avoid bonds that may have refinancing problems because the spreads are not very high.” “Otherwise it could be like picking up coins in front of a speeding train.”
Assuming the borrower is defaulted, investors can expect to receive at least a coupon payment, which makes it especially important when production or expansion activities are loss-making.
“Your first line of defense is as a credit manager,” says Harrer Ninety One.
Week in review
For decades, Hong Kong’s “big four” property dynasties were seen as bastions of moneyed stability. A crisis of confidence in the new world development company is now challenging that thinking.
Morgan Stanley and JPMorgan Chase & Co. This week they scored another coup for private credit lenders when their finance teams secured a $1.2 billion deal for one of Direct Lender’s biggest borrowers, Ardonagh Group Ltd.
Morgan Stanley private equity firm HIG Capital is among a trio of banks that will provide about 700 million euros ($728 million) in debt to buy Kantar Media.
Building materials maker Keycrete Holdings on Friday initiated a $3 billion loan deal to help finance its nearly $11.5 billion acquisition of Summit Materials Inc.
MidOcean Credit Partners’ investment in its riskiest debt obligations has returned up to 25% by 2024, according to a letter to investors seen by Bloomberg.
Altice USA Inc. will reduce the telecom infrastructure company’s nearly $25 billion in debt. He held secret talks with creditors.
Apollo Global Management Inc is relying on its flagship Wagamama brand – and a booming bond market – to reduce borrowing costs in its UK restaurant division.
Credit trading volumes reached a new record in 2024 and could reach new highs this year, which could lead to lower borrowing costs for US companies.
Spain saw record demand for syndicated bond contracts on Wednesday, drawing huge order books from European debt sales as investors braced for higher yields.
Limits on banks’ exposure to risk have opened the door for personal loans to go after high-end customers. And traditional lenders are determined to make the most of it.
On the move
Sergey Goncharov, head of U.S. fixed income at Vontobel Asset Management, has left after nearly a decade.
Todd Lada, formerly a senior executive at Fortress Investment Group, has joined merchant bank BDT and MSD Partners to lead its global capital solutions team.
Banks in the Nordic region are hiring for their investment banking teams in preparation for what they expect will be a wave of mergers and acquisitions. Danske Bank A/S, Nordea Bank Abp, Jyske Bank A/S, Sparebank 1 Markets AS and Pareto Securities AS have all added merchant and corporate finance banks in recent months and plan to further expand their divisions, they told Bloomberg.
— with assistance from Ronan Martin, Tarina Odariar and Dan Wilchins.
