For corporate bonds, volatility is here to stay

The pandemic’s impact on corporate bond markets in the Asia-Pacific region and globally was an intense one, with dramatic volatility, particularly in the first quarter, leaving investors wary and with a highly uncertain outlook heading into 2021.

Sadly, even as the post-COVID 19 recovery and vaccine efforts develop, corporate bond markets are likely to remain highly volatile for the next two or three years, with clear winners and losers, and companies keen to raise funds.

The late-March US Federal Reserve intervention in corporate bond markets – where the Fed kicked off an unprecedented plan to invest in some of America’s biggest companies - was for ANZ, a clear signal for a rally and default expectations have improved considerably as the year progressed.

For 2021, the road is a little less clear, as risk remains elevated and there are still concerns about defaults ahead and abrupt changes in market sentiment to navigate.

Moody’s currently has a worst-case global high-yield corporate default rate forecast of over 15 per cent by the end of the first quarter of 2021, against the historical average 4.1 per cent. Regionally there has already been a record 22 US dollar corporate-bond defaults in Asia through the crisis, and ANZ is expecting more by year end.

The crisis has created a dichotomy of sectors that benefit or struggle, alongside the individual corporate level first-movers and adapters against the slow to react and more-inflexible models. A paradigm shift in customer behavior and supply chains across many industries, as well as welcome progress in vaccines, is unlikely to see a return to business as usual.

Central bank support has been decisive in 2020 but created longer-term market-crashing ‘taper-tantrum’ risk as to when and how they attempt to withdraw support. With investment-grade corporate bond yields of just 2 per cent any major change in market inflation expectations will also see investor losses.

At ANZ, we have been deeply entrenched in the outcomes for the corporate-bond markets in 2020 and our goal is to maintain the market-leading assistance in both views and liquidity for our clients.

Liquidity

As a team, ANZ grasped the seriousness of the COVID-19 crisis as early as Lunar New Year 2020, and this first-quarter caution gave the bank a stronger footing to provide clients with the market liquidity they needed to continue operating effectively.

The Fed’s intervention in late-March was a sharp turnabout event but the market was slow to price that in, given the distractions of major losses and damaged investment appetite across both funds and banks. For its customers, ANZ has been a rare consistent partner in 2020, providing liquidity during the dark days of March and thereafter.

ANZ’s guidance and liquidity provision offered a meaningful contribution to clients and funds in their time of need, as well as safety and stability for many people’s retirement savings.

That consistency has since been recognised with a record haul of awards for credit trading, sales, and strategy by multiple parties in 2020, across both client polls and the electronic-trading-platform rankings.

Assisting

After significant market growth in recent years, Asia’s US-dollar corporate bond market had a front-row seat in in the COVID-19 crisis, amid a doubling in US default rates to 9 per cent.

Away from ANZ’s consistent provision of liquidity to customers, the broader market froze and for a few dark days in March the bond indices struggled to even post closes.

Investors suffered abnormal March high-yield bond losses of 13 per cent and investment grade bond losses of 4 per cent, with portfolio adjustment seeing much larger losses than the paper losses.

Since then, volatility in the market has seen ANZ execute client volumes in APAC corporate bond markets approaching $A250 billion a year. On total client inquiry in effect we are seeing $A1,000 billion a year in potential business passing through ANZ’s franchise trading and sales platform.

The overall market is of course also becoming much larger over time. Asia’s capital markets are benefiting from the established long-term trends towards direct bond-market funding for corporates from the increasing Asian pension and insurance savings pools, as well as ESG bond issuance to fund the sizeable adaption investment needs and opportunities, and China’s developing current account deficit requiring bond funding.

Short-term trends have seen US capital markets lead the way in 2020 with 60 per cent growth in corporate bond market issuance to over $US2,200 billion, Asia itself now posting double-digit growth rates as the region’s companies boost their own liquidity against the COVID uncertainties and take advantage of the historically low bond yields.

Through the crisis, ANZ dedicated itself to assisting our customers through some of the toughest times on record, and the team is committed to continuing that standard of support as the recovery gains speed in 2021.

Owen Gallimore is Head of Credit Trading Strategy at ANZ Institutional