The credit cycle is deteriorating
As a result, the sell-off in US government bond markets, which pushed US bond yields higher (yields rise as bond prices fall) amplified in the corporate bond market .
Rising interest rates spelled the death knell for zero-coupon convertible bonds.
Yields on Triple-B-rated U.S. corporate bonds — the lowest investment-grade credit rating that is still classified as investment grade — climbed to 3.17% as investors fear rising interest rates will rise. Interest only leaves them with heavy capital losses since these bonds usually have lower rates. coupons and longer maturities.
Meanwhile, the yield on Triple-C-rated bonds – the lowest credit rating before default – jumped to 9.02% as investors feared less robust companies could struggle to weather the rise. interest rates.
The waning appetite for risk has seen investors withdraw money from funds that invest in US high yield bonds for four straight weeks, bringing year-to-date withdrawals to nearly US$11 billion. ($15.5 billion).
At the same time, investors are showing an increased appetite to protect themselves against corporate defaults.
Meanwhile, rising interest rates have spelled the death knell for zero-coupon convertible bonds.
Over the past two years, investors have bought just under $57 billion in bonds issued by growth companies such as Airbnb, Snap, Spotify, Shake Shack and Twitter that pay no interest.
Instead, investors who bought the bonds hoped that the stock prices of these growth companies would rise sharply and that they could make a profit by converting their bonds into shares.
But rising interest rates have put pressure on growth stocks and investors are no longer willing to provide interest-free loans convertible into shares.
Weaker eurozone countries
Growing price pressure in the eurozone – inflation hit a record 5.1% in January – prompted the European Central Bank to adopt a more hawkish tone.
Last week, ECB President Christine Lagarde sparked a sell-off in European bond markets when she acknowledged inflation risks were “tilted to the upside” and refused to rule out a rate hike. This year.
The yield on the benchmark German 10-year Bund jumped to 0.2% on Friday, after spending the past three years mired in negative territory.
At the same time, investors are increasingly concerned about the ability of weaker eurozone countries, which are burdened with heavier debt, to cope with rising borrowing costs.
The yield on Italian 10-year bonds jumped to 1.74% (from 0.55% a year ago and 1.22% a month ago).
The spread between the Italian bond yield and the German benchmark, which is seen as a measure of financial stress in the eurozone, hit its highest level in more than 18 months.