Borrowing costs

UK corporate borrowing costs rise above peak of Covid-19 pandemic

This content was published on May 4, 2022 – 09:56

(Bloomberg) —

Yields on the safest pound sterling corporate bonds have passed their pandemic peak, as policymakers at the Bank of England weigh the rate hike to their highest level since the global financial crisis.

Investment-grade yields ended Tuesday at 3.6%, surpassing the high of 3.56% reached at the start of the coronavirus crisis, based on Bloomberg indices. Corporate funding costs are rising on a jump in UK government bond yields as markets brace for further rate hikes.

The milestone highlights market turbulence as borrowers face the highest funding costs in years and investors take heavy losses on their bond holdings. As central banks prepare to tighten policy even further to rein in runaway inflation, the situation looks set to get even worse.

“Obviously if we’re talking about inflation levels of 6, 7, 8 per cent, it’s hard to see a quick turnaround in yields,” said Shalin Shah, credit portfolio manager at Royal London Asset Management, who oversees 159 billion pounds ($198). billion). Predicting when the market’s focus shifts from inflation to a higher risk of recession is “like a coin toss” that might not happen for the next three months, he said.

Bank of England policymakers are due to meet on Thursday amid growing alarm over the UK’s cost of living crisis UK consumer prices rise 7% year-on-year more than three times the Bank of England’s 2% target as inflation hits its highest level in around 30 years.

It’s a similar story in the United States, where the Federal Reserve is expected to raise rates by 50 basis points for the first time since 2000 this week. Traders will be watching closely to see if Chairman Jerome Powell gives any hint as to whether a 75 basis point hike, which would be the most aggressive move in nearly three decades, could be on the cards for June.

Rate hike

Britain’s central bank has already reversed cuts that have supported the economy during the pandemic and another hike would take the key rate to its highest level in more than 13 years. The BoE has raised its key rate in its last three meetings and market prices suggest another 25 basis point increase in the key rate, which currently stands at 0.75%.

Against this backdrop of more aggressive tightening, the sterling credit index has already lost 10.2% in terms of total return this year. The gauge has never produced a double-digit annual loss in its 23-year history.

Yet while the risk premiums of investment grade sterling bonds over government debt have risen by around 50 basis points this year to 167 basis points, they are still only around 60% from the peak they reached at the start of the pandemic.

However, the BOE will increasingly have to weigh the need to fight inflation against the risk of plunging the economy into recession.

“If there’s an advanced economy that’s more at risk of falling into recession, it’s the UK,” Sanjay Raja, senior economist at Deutsche Bank, wrote in a note to clients on Tuesday. “Limited fiscal support to offset record energy price hikes, tax hikes and a major cost of living crisis reducing real disposable incomes at a historic rate all mean the MPC will want to carefully calibrate his movements in the future.”

Elsewhere in credit markets:


Financials lead the European primary market on Wednesday as transactions by SEB AB, La Banque Postale Home Loan SFH and Hypo Vorarlberg Bank push the week’s issuance to a low of 8.6 billion euros (9.1 billions of dollars). Issuers and investors across the continent are waiting to see how the US Federal Reserve plans to fight inflation across the Atlantic ahead of the BOE meeting.

  • A two-part, higher-yielding, dollar-denominated social bond deal from Bayport Management could be priced today, with a three-year tranche offered at a yield of around 12.5% ​​at initial talk on the deal. price
  • April was the second-worst month in a decade for European investment-grade bonds after March 2020, with the index posting a total return loss of 2.75%, according to Bloomberg Intelligence


Sales of dollar bonds in Asia came to a halt on Wednesday as businesses and investors awaited the crucial Fed policy meeting. Little action is likely in the region’s debt markets this week, with public holidays in Japan, China and Indonesia today.

  • India’s central bank has voted to raise its benchmark interest rate by 40 basis points to 4.4% as its 10-year yield hits its highest level since 2019


The Fed is expected to rise 50 basis points on Wednesday, its biggest rise since 2000, while detailing plans to shrink its balance sheet. Two companies sold investment-grade U.S. bonds on Tuesday, after several companies pulled out on Monday and had to try again.

  • Volatility has kept many would-be issuers from selling new bonds over the past two weeks as union offices work to help clients weather the tumultuous swings in asset prices
  • Medical device maker Bioventus Inc. withdrew its junk bond deal because market conditions were “not conducive” to offer terms that would benefit its stakeholders, according to a statement from the company. ‘business

(Adds sections on credit markets)

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