Fixed Income Report
By Mouneil Sethi, Pranit Dutta, Adithya Puravankara, Shawn Teo, Andrew Lee, Thomas Geller, Zhenxiang Lu from the LSESU Trading Society
BoE boosts bond buying by £150bn amidst fresh lockdown
With a second wave of Covid-19 cases and England having entered a lockdown on Thursday, the Bank of England (BoE) has announced its decision to purchase another £150 billion of government bonds in an effort to increase spending within the economy.
This movement was seen to complement the Monetary Policy Committee’s decision to retain interest rates at 0.1%, marking the first time in the central bank’s 326-year history for negative interest rates to have been considered as an option. Since the outbreak of the coronavirus pandemic in March, the Bank has cut rates twice from 0.75% to 0.1%.
With the headwinds of rising Covid rates, a national lockdown and a still-uncertain outlook on Brexit, the BoE has revised the 2021 GDP outlook to grow by 7.25%, down from the previous +9% anticipated at its August meeting. However, with the extension of the government’s furlough scheme, the BoE anticipates for unemployment to peak at 7.75% in the second quarter of 2021 from its current rate of 4.5%.
Divided yet strong?
The market has experienced a series of expectation adjustments on election results and its policy implications. Perhaps the only certainty is in fact, not taxation, but an additional fiscal stimulus to be pushed through the system after the election result is finalised. We are reminded of the limitations of opinion polls and how markets quickly adapt to new narratives.
A divided government with a Republican Senate and Democrat in office could mean less aggressive stimulus packages but also more constrained tax reforms; we have seen a slight decrease in 10-Year Treasury yield pushed by revised inflation expectations and reduced term premium.
UK leisure company bonds hit by burden of second lockdown
The yields on bonds from several UK high street names have now reached double digits, highlighting the pain expected from a collapse in earnings due to lockdown, in contrast to a usually busy pre-Christmas period.
PureGym’s price of its £430m bond slipped from 90p last week to 87p on Monday, with the yield jumping from 9.4% to 10.1%.
This debt, from banks such as Barclays and Jefferies, was part of a Leveraged Buyout in January to acquire rival Fitness World.
However, the banks who underwrote these bonds have been left holding on to this ‘bridge loan’ — they had planned to sell the bonds but investor sentiment towards consumer-facing companies remains low.
In these transactions, banks guarantee borrowers a certain interest rate on the debt; if investors demand a higher interest rate, it is up to the lender to take the losses and sell at a discount.
Loans that banks have been unable to shift to the bond market are known as ‘hung loans’ and there has been a spate of them due to the pandemic.
Stonegate Pub Company, which runs the Yates and Slug and Lettuce bars, as well as the Popworld clubs, issued £1.2bn of 5-year sterling and euro-denominated bonds in July — maturing in 2025, they offered investors a coupon of 8.25% while the euro notes offered Euribor (Euro Interbank Offered Rate) plus 5.75%.
The price slipped to 92p on the pound on Monday, down from 95p before the weekend. The bond gives investors a yield of 10.4 per cent.
These bonds had been issued to purchase rival UK bar operator Ei Group — banks including Barclays have been largely unable to shift this loan either.
Wagamama has £225m worth of bonds due to mature in 2022 – on Monday, bonds were trading at 90p on the pound with yield having jumped to 10.9%.
This is the highest figure for yield since June, before restaurants were allowed to reopen following the first national lockdown.
The price had fallen to 93p on the pound already post 10pm restrictions being implemented.
Asian governments issue record amounts of dollar bonds
Asian governments have been issuing dollar bonds in record amounts in order to raise capital and combat the effects of the pandemic.
Borrowers from the region have raised $354bn in debt denominated in US currency this year, up 13% from last year. In an effort to fortify its balance sheets, the Indonesian government raised $4.3 billion through the sale of bonds, which included Asia’s first 50-year issuance. These figures indicate that quantitative easing measures in America and Europe are a benefit for Asian markets, where default rates continue to remain low despite the Covid effect. The surge in demand for dollar bonds also gives corporates the confidence to rely on debt capital markets more consistently going forward.
Source: Financial Times
The decreasing yields on European bonds have pushed investors to look at Asian markets for greater yield returns.
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