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July 2, 2013 5:43 pm
The second half of the year has started with a whimper for the US corporate debt market as a sell-off in bond prices and record outflows from funds investing in fixed-income assets have spooked borrowers.
In contrast to the typically vibrant activity in the first few days of a new quarter, issuance of dollar-denominated bonds has dried up.
No corporate debt was offered on Monday and no deal was scheduled for Tuesday, according to Dealogic. In comparison, the first two trading days of the past quarter saw sales of new high-grade and high-yield bonds in the US reaching $8bn.
Companies were choosing to postpone sales until markets stabilised, analysts said, rather than see their newly-issued debt sharply decline in secondary markets. The US Independence Day holiday on Thursday, and key payrolls data due on Friday is also weighing on this week’s calendar.
The backlog for new debt issuers is also building up at a time when companies usually try to rush with sales ahead of the so-called quiet period which precedes the start of the US earnings season, which kicks off next week when Alcoa report quarterly results.
“This is usually the time when companies are running to get deals out of the door,” said Adrian Miller, director of fixed income strategy at GMP Securities. “But the dynamics of US debt capital markets have changed dramatically since the last Fed meeting. That game of indiscriminate bond sales is over.”
Corporate borrowers were closely watching activity in secondary markets and fund flow data for signs of further pressure on bond prices, Mr Miller said.
Since the start of May, when Ben Bernanke, Federal Reserve Chairman, said a stronger economy may prompt fewer bond purchases, Treasury yields have risen from 1.68 per cent to 2.48 per cent on Tuesday.
The move in corporate bonds was even sharper, with average yields on junk-rated US debt - one of the most popular securities among investors in the past year - jumping 2 percentage points.
Wary investors have pulled $23.7bn from US bond funds in the past four weeks, according to Lipper, marking the worst four-week period of outflows since October 2008 as the majority of bond funds posted heavy losses.
Markets have showed signs of stabilisation this week, with most high-grade and junk-rated bonds trading slightly higher, according to Standard & Poors LCD.
Jeffrey Rosenberg, BlackRock’s chief investment strategist for fixed income, said investors were questioning how much higher interest rates would go and whether they should cut their bond losses now.
“The short answer is not much higher in rates,” he said. “But those returns [on bonds] call for considering whether ‘traditional’ bond strategies still make sense now that their risks have finally been revealed.”
Additional reporting by Michael Stothard
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