UK corporate bond rally battered as ‘adult’ takes charge

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The appointment of Rishi Sunak as British Prime Minister spurred a rebound in the struggling sterling-denominated corporate bond market, helping to restore investors’ perception of credibility and encouraging traders to seek out cheap debt.

Among them, Paola Binns, portfolio manager at Royal London Asset Management Ltd.

“There is a bit of relief going on as an adult seems to be in charge of government,” said Binns, who helps oversee £150bn ($169.4bn) in assets. “I expect corporate bond markets to improve.”

The market seems to be generally in agreement. Yields on investment-grade British pound corporate bonds posted their second biggest daily decline on Monday, according to data compiled by Bloomberg. They remain at high levels, around 6.3%.

Markets are seeing some easing from the turmoil sparked by the short-lived government of Liz Truss, whose unfunded tax cut plans have spooked investors, threatened a key strategy of the country’s pension funds and forced the Bank of England to intervene.

The chaos has limited companies’ ability to raise funds in the capital markets, with companies at one point facing the prospect of paying a record £3.5million in additional interest charges each year to replace the old debt with a new one.

Businesses can now be more confident to get back into the market. Last week’s show by Northumbrian Water Ltd. was the first non-financial sterling bond issue since early September, according to data compiled by Bloomberg. Northern Ireland Electricity Networks Ltd is offering a new sterling note on Tuesday maturing in just over 10 years.

Binns said she sees opportunities in shorter maturities as well as triple B-rated bonds because of their wide credit spreads. An ICE BofA index showed a spread of 282 basis points between sterling triple B bonds and government yields, around 100 basis points above the average for the past decade.

While the average maturity of the sterling bond market has fallen this year, the prices of safe notes remain highly exposed to swings in government bond yields.

“If the UK regains credibility with investors and rates stabilize, that will of course benefit credit markets,” said Pierre Verle, head of credit at Carmignac Gestion, which oversees 33.2 billion euros. ($32.8 billion).

Credit has underperformed equities this year. Investment grade British pound corporate bonds lost almost 23% according to the Bloomberg indicator, compared to a fall of around 5% for the blue-chip FTSE 100 index. Verle sees that gap eventually narrowing if the credit sentiment improves.

“I don’t think the credit will stay as wide as it still is,” he said.

Elsewhere in the credit markets:

EMEA

Eight borrowers are looking to tap into the European primary market on Tuesday to raise at least 3.89 billion euros. Meanwhile, the earnings season is gaining momentum in Europe.

  • Earnings from Swiss pharmaceutical company Novartis were supported by new drugs. The company also raised the guidelines of a unit it is creating

  • UBS reported higher-than-expected third-quarter profit as higher interest rates helped offset lower client activity in wealth management

  • HSBC has appointed Georges Elhedery as its new chief financial officer, making him a potential candidate for the top job; shares fell after higher-than-expected charges for potential loan losses

  • Blackstone-owned Cirsa seeks to sell junk-listed bonds as market sentiment and corporate earnings stabilize

Asia

Credit markets in Asia are reporting some of the largest increases in risk aversion in any month in recent memory, as soaring global borrowing costs come up against growing concerns over China’s policy outlook.

  • Chinese high-yield notes fell about 1 cent, credit traders say

  • Meanwhile, spreads on some offshore 10-year notes sold by Chinese tech firms have widened by at least 10 basis points, traders say

  • More broadly, Asian high-quality USD bond spreads widened by at least 3 basis points, traders said

  • Trading flow in the primary Asian dollar bond market was further reduced on Tuesday amid market volatility

Americas

Sales of junk bonds are falling at an unprecedented rate globally as interest rates rise, a double whammy for riskier companies that will need financing over the next few years.

  • Preliminary forecasts for this week suggest $20 billion in new bond sales. As earnings rise, domestic companies that have reported results will be free to sell debt and could account for most of the volume

  • Wall Street’s biggest banks could join companies emerging from profit blackouts to sell new bonds over the coming week as a rare moment of reprieve sweeps through high debt markets quality

  • For deals updates, click here for the New Issue Monitor

  • To learn more, click here for Credit Daybook Americas

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