Bond investors are already betting on a return to normal life
Not so long ago, airlines and real estate companies were asking for emergency aid and precautionary bank loans. Now investors are desperate to lend them money.
The bonds of EasyJet Plc and UK property manager Hammerson Plc are among the best performing in Europe this year. Investment-grade companies in both sectors sold nearly $ 22 billion in euro and pound sterling debt, the fastest pace of issuance since the start of the year since at least 2010.
Fund managers bet vaccine deployments in UK and US will return to normal life by summer, even as much of Europe suffers from third wave of pandemic . Banknotes from companies affected by the virus are also offering good value after central bank bond purchases lowered corporate yields.
“Basically, there’s a really good reason why investors support these stories,” said Andreas Michalitsianos, portfolio manager at JPMorgan Asset Management, which oversees $ 2.3 trillion. “In most cases, they’re not going to default, they’re not going to become high performing, and their business models aren’t fundamentally broken.”
Michalitsianos is looking to buy back the laggards in the hope that they will continue to close the gap with the wider market. EasyJet 2025 ticket yields are more than 100 basis points higher than the index. Bonds from real estate firm Kennedy-Wilson Holdings, Inc. and bus operator FirstGroup Plc are also trading at a premium despite a rally this year.
Reopening of bets
Others warn that optimism is not sustainable, because a successful deployment of a vaccine does not necessarily equate to a return to work and travel habits before the pandemic.
Sectors like travel and real estate could suffer from ‘long-term structural shortages of demand’, prompting investors to demand higher compensation for owning them, said James Vokins, UK Prime Credit Manager at Aviva Investors.
Last year, businesses around the world borrowed more than $ 430 billion in new loans and used at least $ 340 billion of existing lines of credit to deal with the pandemic. Some travel and leisure companies lined up new financing deals as late as January.
London Gatwick Airport is one borrower looking to test the reopening mood. The company, which asked investors to change the terms of its debt last year to survive the drop in traffic, is now looking to raise 400 million pounds ($ 554 million) with an upcoming sale of new bonds.
The potential reopening also strengthens the outlook for inflation, pushing government bond yields higher and reducing the total return of corporate bond indices. So far, investors have responded by abandoning interest rate risk while increasing credit exposure before economies return to normal.
Finding cheap bonds is becoming a necessity as spreads in the larger European investment grade bond market have struggled to tighten any further than pre-pandemic levels reached in late 2020.
In the UK, where the vaccination program is more advanced than in other major economies, the government has set June 21 as the earliest date for the end of all restrictions in England.
“There is still value in the sectors that suffered last year and we are positioned for their recovery,” said Serena Galestian, portfolio manager at Insight Investment in London, which oversees £ 753 billion (£ 1,000 billions of dollars). “Given the pace of vaccine rollout, at least in the US and UK, we can now see the path to normalcy. “
This article was provided by Bloomberg News.