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March 3, 2024
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The Easy Money Has Already Been Made in Bonds


(Bloomberg) — Asset managers, worried that the end-of-year rally on expectations of a soft landing was overly optimistic, are selling bonds and boosting their cash holdings.

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Bond allocations among fund overseers have tumbled 17 percentage points since the same time last month, according to a Bank of America Corp. fund manager survey published this week. The amount of money they parked in money market funds and other cash vehicles rose 13 percentage points in the same period.

Taking profits in bonds makes sense now. Because short-term rates are so high relative to intermediate- and longer-term yields, a junk bond doesn’t pay that much more yield than a Treasury bill. And monetary officials caution that markets have grown too confident that rate cuts are coming soon. Traders are broadly tempering bets on the number of interest rate cuts by central banks this year.

“This is a month to sell risk into a rally rather than aggressively chase risk,” said Adam Darling, a high-yield bond fund manager at Jupiter Fund Management Plc, who is among those increasing his allocation to cash. “If data indicates anything other than a soft landing there will be a lot of panic in the market.”

For managers like Darling, it’s becoming harder to justify holding bonds that can slump if rates fail to fall as much as expected or if fears of a recession start to intensify. Geopolitical tensions, including attacks by Houthi militants on commercial vessels in the Red Sea, could cause inflation to start to tick back up again, complicating the outlook for monetary easing.

Click here to listen to a podcast on the growth of private credit

Rates traders are currently pricing in more than five 25-basis-point cuts this year in the euro region and the US, and more than four by the Bank of England, according to data compiled by Bloomberg.

Easing is likely in the summer, European Central Bank President Christine Lagarde said this week, while cautioning that the aggressive bets are “not helping our fight against inflation.”

Allspring Global Investments is among the money managers that still see an opportunity in bonds because yields are high enough to compensate for inflation, said Henrietta Pacquement, head of global fixed income and sustainability at the firm. But there could still be pressure on the debt this year, she said.

“We would be amazed if we didn’t have at least one spread selloff this year,” said Jupiter’s Darling. “The economic environment is so volatile that we could have a selloff on even a small piece of bad news.”

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Week in Review

  • UBS Group AG has moved away from Credit Suisse’s original plan to sell its $250 million distressed-debt business to a single bidder after it failed to attract enough interest, and is instead planning to dispose of the assets individually.

  • Trading volume for US blue-chip corporate bonds hit a record last year, and could grow again in 2024, as investors have looked to snatch up notes while yields are still relatively high and supply of new bonds hasn’t been able to keep pace.

  • Global leveraged loan sales are booming as issuers take advantage of strong buyer demand ahead of any cuts to interest rates and election-fueled volatility later this year.

  • Companies are rushing to borrow money in the US high-grade and junk bond markets, with blue-chip debt sales approaching the highest for a January since 2017, as corporations look to take advantage of recent drops in yields.

  • Demand for Europe’s debt sales is running at a record pace as investors clamor to lock in attractive yields before central banks start cutting rates.

  • Until recently, real estate was the poster child of what can go wrong when interest rates rise rapidly. But now, bond prices are jumping and investment banks including Goldman Sachs Group Inc. are endorsing the embattled sector.

  • The global speculative-grade default rate rose to the highest level since May 2021, on the back of higher funding costs, inflation and tighter financing conditions, according to a Moody’s Investors Service note.

  • Borrowing costs in China’s yuan bond market used by lower-rated firms and local government financing vehicles have dropped to the lowest in almost two decades, following a string of government measures to clean up bad debts and boost the economy.

  • Major Chinese lender Ping An Bank Co. has put 41 developers on a list of builders eligible for its funding support, a shift toward more lending to a property sector in crisis following government steps to stanch the pain.

  • JPMorgan Chase & Co. is in talks to clinch $2.5 billion to $3 billion of third-party commitments to grow its private credit strategy.

  • Royal Bank of Canada reopened the loonie-denominated market for debt similar to the notes issued by Credit Suisse Group AG that were wiped out last year.

  • Dish Network Corp.’s debt exchange ambitions are causing consternation among traders who bought a form of insurance that pays out if the struggling satellite television company defaults.

On the Move

  • Five Credit Suisse portfolio managers are leaving the bank to set up a new global macro fund at the alternatives platform of Lombard Odier Investment Managers.

  • Kevin Burke, a longtime banking executive who was an early figure in the leveraged loan business, has died after a battle with pancreatic cancer.

  • Paul Gibbs, Citigroup Inc.’s current co-head of EMEA loans and leveraged finance, is set be given a bigger role that will include debt capital markets for the region.

  • Carlyle Group Inc. has appointed Peter Mackie to global head of credit distribution, replacing Andrew Curry, who is leaving the firm.

  • David Hirschmann and Ariadna Stefanescu were appointed co-heads of Permira Credit, after former head James Greenwood stepped down from the business in 2023.

  • StoneX Group Inc. is seeking to grow its distressed sales and trading business at a time when larger firms are exiting the market.

–With assistance from Dan Wilchins.

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©2024 Bloomberg L.P.



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