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Corporate bond sell-off tests investor appetite

A sell-off reverberating through sovereign bond markets tested investor appetite on Monday for a multibillion-dollar corporate bond sale, as money managers wait for volatile price swings to subside.

Pfizer successfully completed a $6bn bond sale on Monday but several investors familiar with the sale said interest was subdued by the recent volatility in fixed-income markets, which has seen the yield on both the 10 and 30-year Treasuries climb 40 basis points since the election.

The rout has weighed on bond prices, with fixed income investors facing paper losses of more than $1.5tn since the unexpected election of Donald Trump last week. Volatility in Treasury markets has surged to its highest level since February, according to Bank of America Merrill Lynch.

“The tone was very strong immediately after the election,” said Hans Mikkelsen, a credit strategist at Bank of America. “Today we are seeing a weaker tone.”

Corporate debt markets have not been as affected as sovereign bonds by the sell-off, with bankers and investors pointing to the stability of spreads — the difference between the yield on a corporate bond and a similarly maturing Treasury. Some of the largest corporate bond exchange traded funds have also seen inflows over the past week, according to Bloomberg data.

The surge in rates have nonetheless pushed yields higher, with an investment grade US corporate bond index from Bank of America putting yields at the highest level since March. Yields rise as bond prices fall.

“Higher rates in the near term will have a direct negative impact on total returns in investment grade,” said Oleg Melentyev, a credit strategist with Deutsche Bank. “Higher rates should also alleviate, to some extent, the hunger for yield and the push to reach for it in credit.”

Orders for the Pfizer transaction reached $14bn, the people added. The company priced $1.25bn of new 30-year debt with a yield of 4.14 per cent, slightly above the 4.07 per cent yield on its outstanding 2044 notes. New 10-year paper from the double A rated group priced with a yield of roughly 3.1 per cent, higher than the 2.96 per cent on Pfizer’s debt that matures in 2026.

Bond sales have set a record pace so far this year, with companies, governments and agencies issuing nearly $6tn of debt, Dealogic data show. Many of the big deals before the election were several-times oversubscribed, including offerings from Verizon, Microsoft and Mondelez.

Activity in secondary bond markets have been elevated since the election, with average daily trading volumes 25 per cent higher in investment grade bonds and more than 30 per cent higher for junk debt, according to Trace data compiled by MarketAxess.

Mr Mikkelsen added that while US investors had taken a pause, foreign investor appetite persisted as money managers search for income in a world where $11.8tn of bonds trade with a yield below zero. Once rates stabilise, US investors should return to the market, pushing yields lower, he said.

“What foreign investors have been doing today is buying 30-year bonds and selling bonds in the front of the curve, attracted by the higher yields,” he said. “That is a pattern we have been seeing since the election.”

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