Investors are losing money on new corporate bond issues for the first time in five months as the market struggles to digest the busiest start to a year for European sales since 2009.
Investment grade and junk-rated notes sold in January by companies including Spain’s Telefonica SA (TEF) and Abengoa SA (ABG), the renewable energy company, dropped an average 0.6 cents on the euro, according to data compiled by Bloomberg. It’s the first time newly-priced debt has fallen since August, and matches the average loss over 30 days for securities sold that month.
“It’s not unhealthy for the market to have a reality check now,” said Steven Logan, the Edinburgh-based head of European high yield at Scottish Widows Investment Partnership Ltd. “We’ve had this slightly chaotic spell of issuance with far too many transactions and people don’t have time to look at secondary which is now languishing.”
Sales of investment-grade debt reached 22.6 billion euros ($31 billion) in January. The 1.5 billion euros of 10-year bonds from Telefonica, Spain’s biggest phone operator, are the worst performing, losing 4.5 percent since issue on Jan. 8.
Ten-year bonds sold by Spain’s largest energy company Gas Natural SDG SA (GAS) on Jan. 9 are the second-worst performing, dropping 3.28 euro cents to 95.86, Bloomberg data show. German phone company Deutsche Telekom’s 2.125 percent bonds issued Jan. 10 declined 2 euro cents to 97.04.
Sales of high-yield debt reached 6.8 billion euros in January, a record for the month, data compiled by Bloomberg show.
Abengoa, rated B+ by Standard & Poor’s, issued 250 million euros of 8.875 percent bonds Jan. 24 that have since fallen 1.9 euro cents. Cerved Technologies SpA’s 6.375 percent 2020 bonds sold Jan. 15 have dropped 0.87 euro cents to 99.13, Bloomberg data show.
Speculative-grade, or junk, debt is ranked below Baa3 by Moody’s Investors Service and BBB- by Fitch Ratings and S&P.
“A number of January deals are underperforming,” said Jorgen Kjaersgaard, a portfolio manager at AllianceBernstein Ltd. in London, who oversees about 2.8 billion euros of European high yield bonds. “Some names were already trading tight in weaker sectors and didn’t see much net demand from long only accounts.”
Waning demand for corporate credit comes as Bill Gross, manager of the world’s biggest bond fund, said investors should position for the end stage of a “supernova credit explosion” because there’s likely to be more inflation than growth.
“The countdown begins when investable assets pose too much risk for too little return,” he wrote in a note posted on Newport Beach, California-based Pacific Investment Management Co.’s website.
European corporate debt lost one percent this year, the biggest monthly decline since November 2011. That’s worse than the 0.4 percent loss on corporate bonds globally, Bank of America Lynch Index data show.
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