Year-to-date new issuance record, at $600 billion, and global bond performance on the up: here’s which segments.
Investors’ appetite for bonds has fueled record issuance and strong performance for this asset class into early 2023. As of January 18, global fixed-income securities sold have reached $600 billion, a record for the period, Bloomberg said. In parallel, the average performance of bonds since the beginning of the year was 4.1%: the most generous since at least 1999.
Looking at the emissions landscape in more detail, however, interesting nuances emerge within this market. The majority of the increase in emissions, in fact, is concentrated in the Euro area which in these first 18 days of 2023 has observed a leap of 39% on an annual basis. For bonds denominated in dollars, on the other hand, issues are in line with last year’s volumes.
In addition, businesses and investors have focused more on investment grade issues, characterized by a higher rating and greater financial solidity of the issuers: in this segment, issues by financial companies dominate, whose issues in the period under examination are amounted to 250 billion dollars, or 41.67% of the total.
Handbrake on For Junk Bonds
However, high-yield, high-yield and high-risk bond issues have lagged behind. With only 24 billion issued as of January 18, this is the least dynamic start for this segment since 2019. The higher probability of insolvency of junk bond issuers, in fact, would have discouraged investors from jumping into these issues on the eve of a potential recession. At the same time, issuers could wait for interest rates and inflation to fall before seeking new resources on the market, which today would cost issuers relatively dearly in terms of interest.
In terms of preference on maturities, the increase in issues at the beginning of 2023 was driven by medium-short horizons. In particular, maturities within three years increased by 80% to 138.5 billion, thus representing around a quarter of the total. There has been less interest, however, in issuing long-term bonds such as 10-year and beyond, which could in the long run translate into a persistent burden for companies (assuming that inflation gradually normalizes and that the real yield offered from these emissions is positive).
Performance Expectations
According to the performance expectations of the Bloomberg research unit, the bonds that should observe a greater price increase (which goes hand in hand with a reduction in yields for new issues) will be the highly rated US ones (10%), followed by bonds issued in emerging countries and by those of the euro area, again investment grade, with performances of 8 and 4.5% respectively. On the other hand, the outlook for junk bonds is less favourable, the yields of which are expected to fall less in the course of 2023.
In 2022, bonds, fresh from years of large injections of liquidity and low interest rates, had to deal with the start of the squeeze and a shock of higher than expected inflation which drastically reduced the real value of the coupons offered. Several analysts have foreseen the beginning of a turnaround for this year: if inflation were to have reached its peak, as some macro data for some time now seem to indicate both in the US and in the Eurozone, the central banks would not have reason to raise rates further. Indeed, they could decide to start lowering them if the economy slows too much. If these expectations materialize for bonds, current yields could be close to the peak and, therefore, represent an excellent buying opportunity for investors.
As Much as The Yields That Bonds Offer Today
The yields offered today by the majority of US bond categories yield more than 4%. In detail, as of January 18, Broad Market Bloomberg Fixed Income Indices indicates 4.180% for US government bonds (with a performance of 0.95%) since the beginning of the year. The corporate bond index rises to 4.890% (and performance of 1.05% since the beginning of the year). According to the JPMorgan index, global government bonds offer an average yield of 2.740%, which rises to 7.295% for the emerging category alone. In the universe of advanced countries, the juiciest yields are currently offered by the Italian government and that of the United Kingdom, with 10-year yields of 3.84% and 3.349% respectively.
This article is originally published on we-wealth.com