Greek fallout will add to company costs globally
Published 09/02/2010 | 05:00
Corporate borrowing costs are rising at the fastest pace in more than two months on concern that worsening government finances will slow the global economy and make it harder for companies to meet debt payments.
The extra yield investors demand to own corporate bonds instead of government securities widened four basis points last week to 169 basis points, the most since the period ended November 27, according to the Bank of America Merrill Lynch. Spreads widened for three weeks, the longest stretch in about a year, while those for US high-yield, high-risk companies expanded by the most since August.
Optimism over the recovering economy that made January the best start to a year since 2001 for the corporate bond market is fading as finances in Greece, Spain and Portugal deteriorate, Japan struggles to emerge from recession and concerns grow that emerging-market valuations are too high.
"The potential impact of spill-over into other markets has gotten folks to look at risk assets of all types, and you're seeing a pullback across the globe," said Bank of America spokesman Andrew Karp. Declining issuance and widening spreads may continue as borrowers monitor how government deficits are managed in Europe, he added.
Elsewhere in credit markets, emerging-market bond spreads are the widest since November, the cost to insure corporate debt against default is near the highest in two months, and prices of securities backed by US government agencies Fannie Mae and Freddie Mac with relatively high coupons have reached record highs.
At their meeting in Iqaluit, Canada, the Group of Seven finance ministers pledged to press ahead with economic stimulus measures even as investors intensify their focus on mounting budget deficits. Canadian finance minister Jim Flaherty told reporters that "we need to continue to deliver the stimulus to which we are mutually committed and begin looking at exit strategies to move to a more sustainable fiscal track".
"They are running a gauntlet, hemmed in between debt crisis on the one side and a double-dip recession on the other," said financial analyst TJ Marta. Sovereign debt concerns are overshadowing positive economic news, said Deutsche Bank.
The US unemployment rate fell to 9.7pc in January, the lowest level since August. White House economic adviser Lawrence Summers said the nation is not "too far" from the start of a rebound in jobs.
Credit-default swaps on the Markit iTraxx Crossover Index, linked to 50 mostly high-yield European companies and used to speculate on creditworthiness or to hedge against losses, rose four basis points to 498.
"The concern is, if you have a sovereign default, who is exposed?" said Joe Jackson, head of credit research at Eagle Asset Management, which invests 18bn. "It looks like people are aggressively trying to buy protection against Greece, which leads you to think there's a lot of exposure out there."