Global corporate bonds lost $1.4 trillion in Q1, and risks are rising

LONDON (BLOOMBERG) - Investors in corporate bonds are bracing for more trouble after getting hammered by rampant inflation and rising yields in the first quarter.

The worldwide pool of the safest corporate debt has shrunk by US$805 billion (S$1.1 trillion) this year, while the global junk market has lost US$236 billion (S$319 billion), according to data compiled by Bloomberg. That is the biggest dollar decline since records began more than 20 years ago, following a borrowing binge propelled by record-low funding costs.

The slump marked the biggest total return loss for high-grade bonds since Lehman Brothers' collapse and the worst junk performance since the start of the pandemic. The United States investment grade market alone saw about US$440 billion in market value erased and is on track for the biggest three-month slump since 1980.

Credit remains under pressure from inflation, which is pushing central banks to boost rates, in turn risking an economic slowdown and causing plenty of angst for investors.

"We are far enough from the inflation picture being clear that you can't help but think that volatility will persist," said Mr Brad Rogoff, a head of global research at Barclays.

Meanwhile, Russia's invasion of Ukraine has increased concerns about Europe's ability to fulfil its energy needs and is further disrupting already struggling supply chains around the world.

"We've really got a lot of things... to contend with," said Ms April Larusse, head of investment specialists at Insight Investments, which oversees £867 billion (S$1.5 trillion). Given that "there can be endless talk and quite little progress" between Russian and Ukrainian negotiators, "it's probably unwise to put a large directional bet", she said.

As losses racked up, retail investors yanked cash from bond funds. Outflows are likely to intensify as they tend to lag returns by about a month, Bank of America (BOA) strategists wrote in a note on Tuesday (March 29).

A recent BOA survey found that inflation is the No. 1 concern among credit investors right now, followed by geopolitical risk. Investors "remain bearish", BOA credit strategist Yuri Seliger wrote.

Sceptical Nato allies are evaluating whether Russia's promise to scale back military operations in Ukraine marks a turning point in the conflict or is simply a tactical shift. Hopes for progress in negotiations helped bring spreads in global high-grade debt below levels last seen before Russia's invasion of Ukraine on Feb 24. Morgan Stanley's US and European credit strategy chief warned that this could prove a blip as focus shifts to central bank hawkishness.

Losses have been coming from all sides, especially in the high-grade market, which is more exposed to the global rise in government bond yields as central banks tighten policy. This is due to their higher duration, bond parlance for price sensitivity to changes in interest rates.

Yields on 10-year US Treasury and German government bonds have surged to their highest levels since 2019 and 2018 respectively. US two-year yields briefly exceeded the 10-year level on Tuesday for the first time since 2019, signalling that rate increases by the Federal Reserve could trigger a recession.