Rising bond yields spark rush for exits

Sharply rising long-dated government bond yields are weighing on credit markets, testing the resolve of investors who piled into riskier debt this year as the European Central Bank flooded the financial system with money.

Investors have pulled money out of exchange traded funds that track global corporate bonds at a record pace, with $1.8bn leaving the sector in the past five days, according to data provider Markit.

The rush for the exit comes as eurozone and US government bond yields rose further on Wednesday. German 10-year Bund yields have climbed 47 basis points since mid-April, and US 10-year Treasuries 29 bps over the past week.

Such a rapid rise in yields has surprised investors and reduced broad fixed income portfolio gains, particularly for bonds with a lengthy maturity.

"The back-up you have had on both sides of the Atlantic - in Treasuries and Bund yields - is what is driving most of the swings you are seeing in total returns," said Hans Lorenzen, head of European credit strategy at Citi.

In general corporate credit has not fallen as heavily as government debt, suggesting a degree of resilience in the market, while the recent rise in bond yields was enticing a hefty burst of new dollar debt issuance on Wednesday, led by Apple and Shell with large benchmark-sized offerings.

"The interesting thing about this sell-off is that relative to government bonds corporates have held in well," said Nicholas Gartside, chief investment officer for fixed income at JPMorgan Asset Management.

Much of the weakness in the credit market is concentrated among holdings of long-dated bonds, a sector that enjoyed a solid start to the year, as investors were encouraged by the ECB's launch of quantitative easing, suppressing borrowing costs.

Global companies rushed to issue debt in Europe during the first quarter, taking advantage of investor appetite for fixed income by issuing longer-dated bonds at lower yields.

But investors are now paying the price as bond prices for longer maturity debt are far more sensitive to changing interest rates, meaning the sharp rise in yields has inflicted substantial losses on them.

British American Tobacco issued a €600m 30-year bond in March, which has slumped 14 cents to 90.5 since mid-April, underscoring the so-called duration risk associated with debt of a lengthy maturity.

"A lot of investors were long and overweight duration, buying into the lower yields for longer argument underpinned by QE," said Thibault Colle, strategist at UBS.

"I expect the hit is pretty big and widespread. Because of the lack of liquidity, the adjustment has been more brutal, with moves in reaction to macro data several times larger than what they would usually be," he added.

© The Financial Times Limited 2015. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation