UK Credit Deemed Cheap by Investors Who Say Worst Is Priced In
The worst selloff since the financial crisis has run too far is predicted by Bloomberg's investors who are watching the wreckage of the UK bond market for bargains and scouring the wreckage of the UK bond market for bargains.
By June 21, with rising inflation raising the likelihood that the country would pitch into a prolonged recession, yields on sterling-denominated investment-grade corporate bonds had risen almost 250 basis point for the year to 4.5%, their highest level for a decade, according to Bloomberg indexes.
Money managers swooped on everything from battered junior debt of British lenders to sterling corporate bonds with rates above comparable US and European issuers. After funds were flown in, risk premiums for sterling high-grade and junk-rated corporate debt are now at their lowest level in almost two months.
Paola Binns, head of sterling credit at Royal London Asset Management, said the entry point was OK because Britons are bracing for an icy economic blast due to inflation set to exceed 13% later this year and a recession that could stretch for five successive quarters, according to the Bank of England's estimates.
Opportunities can be created for investors who are prepared to take the view that much of the economic pain is already baked into prices, despite such struggles.
In June when banks had to offer coupons of near double-digits to raise capital with junior debt, Binns snapped up a contingent convertible bond issued by Barclays Plc. It is now trading at 4 pence above its issue price.
What are the chances that large global banks will go bust? Binns said so. They are lowly-levered and aware of what is coming down the track. According to ICE BofA indices, the pound'sdenominated investment-grade corporate bonds are down almost 12% this year, their worst performance on record. Their junk-rated peers have lost 9.5% since 2008, the most since 2008.
The UK market's smaller size also creates the chance to grab opportunities in well-run firms when fewer competing asset managers are paying attention, especially in the junk-rated segment.
Nachu Chockalingam, senior credit portfolio manager at Federated Hermes, said that sterling's high yield comes at a premium to the US and Europe, as it isn't as closely followed. If you like the company, it is a good way to access credit risk, given the spread premium you will likely earn. Chockalingam said she is being selective about what she buys as companies in sectors that are more consumer-oriented, such as travel, leisure and autos, could come under pressure over the next six to 12 months.
The recent price action in the sterling corporate bond market shows that investors are happy to hunt for cheap debt even though they know more economic storms are brewing.
Eoin Walsh, a portfolio manager at TwentyFour Asset Management, said in a note after the Bank of England s latest meeting earlier this month that investors are becoming more confident that the potential bad news is already reflected in asset prices.
Even so, he prefaced that report saying abandon all hope ye who enter here referencing the part about hell in Dante's Divine Comedy.
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