(Bloomberg) — Credit investors are in a “sell what you can” mood in an environment of rising rates and political tensions, a Bank of America Corp. survey showed, with Goldman Sachs Group Inc. strategists telling clients to switch to cash.
The net overweight position in investment-grade credit has dropped to 16%, the lowest since February 2019, as investors slash bullish bets on bank bonds and boost cash levels, according to Bank of America’s latest European investor survey. That chimes with Goldman’s call on Monday to move to underweight on corporate bonds.
The Wall Street views come as corporate bonds slid on Monday as investors turned to havens, with tensions rising over Russia’s military buildup near Ukraine. That added to losses bond investors have already suffered this year given expectations for interest-rate hikes and the tapering of central bank asset purchases.
“Investors are still terrified over central bank policy errors after a decade of financial repression,” Bank of America strategists said in a note, adding that investors classed it as the No. 1 risk for the third straight survey.
The rush for cash is helped by better yields in short-dated rates markets, according to Goldman’s research team. Rising yields have already prompted a record cash glut in the euro-area economy to the tune of 4.5 billion euros ($5.1 billion).
“Credit needs to rebuild risk premium in the face of reduced policy support and worsening demand technicals,” Goldman strategists including Christian Mueller-Glissman and Cecilia Mariotti said in a note, downgrading credit and lifting cash to overweight in their asset allocation.
They expect the iBoxx euro investment grade index to be 24 basis points wider by the end of the year and the high-yield equivalent to add 69 basis points. A global credit index has seen returns drop more than 4% this year.
The cost of insuring European junk-rated debt surged further on Monday to a 15-month peak, with high-yield funds having lost 2.1% of assets under management, the worst start to the year since 2018. Sales in primary markets have dwindled as deals get pulled.
Reduced central bank support for the European corporate bond market means the Goldman strategists recommend being underweight euro corporate spreads against their U.S. dollar peers both in investment-grade and in junk bond markets.
The mix of higher real yields and an easing of the impact of the Omicron Covid variant should help create some growth momentum in the second quarter of 2022, the strategists said. Without better growth momentum, they see risky assets as more vulnerable to shocks.
Elsewhere in credit markets:
EMEA
Primary bond issuance is expected to stay muted this week following geopolitical turbulence and two pulled sales last week, as investors reassess risk appetite for credit globally.
- Lower Saxony is the only issuer to brave the market so far on Monday. The increased volatility could increase demand for havens such as sovereign debt and market participants are expecting the SSA sector to lead issuance for a fourth straight week
- Bonds issued by Russian corporates in foreign currencies are falling in value Monday on tensions over Russia’s military buildup near Ukraine, with Gazprom’s one billion-euro hybrid bonds falling 2.1 cents, the most in three weeks
- Europe’s rescue fund ESM sent a request for proposal to banks for a possible transaction, while Slovenia is considering issuing euro-denominated notes subject to the results of a tender offer
- Three new CLOs priced in Europe late Friday, with triple-A coupons holding to 92 basis points, with the exception of a debut issue from Acer Tree Investment Management
Asia
Asian dollar bond deals had a slow start Monday as global yields traded firm after a volatile week.
- Investors were also eyeing oil’s surge toward $100 a barrel
- China-based issuer, Beijing State-owned Capital Operation & Management is the sole firm to advance deal plans so far Monday, with the announcement of a mandate for a potential euro-denominated note
- Zhenro Properties Group Ltd. dollar bonds extended declines Monday after plunging last week on concerns about the planned redemption of a note
Americas
Treasury yields rose across the curve with those with shorter maturities leading the increase as a flight-to-safety bid that had overtaken the market late last week slowed after Russia’s Foreign Minister Sergei Lavrov proposed to continue talks with the West over Ukraine.
- Dealers are expecting another week of muted activity in the investment-grade bond market this week, as they expect $15 billion to $20 billion of new supply. Volume of almost $14 billion last week fell well short of projections
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