Losses also on the bond market - the week was dominated by Fitch's downgrade of the USA. The UK also continued its course of interest rate hikes. What happens next in the U.S. could become clearer this afternoon.
4 August 2023. FRANKFURT (Börse Frankfurt). Falling stock prices and falling bond prices - the rating agency's downgrade of the U.S. from its top credit rating of AAA to just AA+ sent prices tumbling this week. "It was a bit of a quake in itself," reports Arthur Brunner of ICF Bank. Yields rose in return: ten-year U.S. Treasuries are currently yielding 4.18 percent again, ten-year German bunds 2.61 percent. A week ago, they were 4 percent and 2.49 percent, respectively.
Overall, however, the U.S. downgrade is likely to have very little direct impact on the market, says Björn Jesch, CIO at DWS. "At least in terms of the 'erosion of governance' mentioned by Fitch and the 'repeated political squabbles over the debt ceiling,' the worst may be behind us." In the long term, he said, there could at best be minor shifts toward bonds issued by AAA-rated countries. In any case, the rating agency S&P had already downgraded the U.S. in 2011.
"End of interest rate hikes approaching in the UK as well".
Apart from that, the talk continues to be about key interest rate hikes. The U.S. labor market report due for publication this afternoon is eagerly awaited. This is expected to provide information on the state of the economy, with consequences for monetary policy. In the UK, the Bank of England yesterday (Thursday) raised the key interest rate by a further 25 basis points to 5.25 percent - the highest level in 15 years. "The key factors were the firm labor market and stronger wage growth," reports Ulrike Kastens of DWS. "Mainly because of further strong wage growth, we expect the key interest rate to be raised again in September by 25 basis points to 5.50 percent." However, the end of interest rate hikes is also near in the UK.
Government bonds instead of time deposits
Brunner sees continued interest in U.S. government bonds - despite lower Fitch rating. "The downgrade is not bothering retail customers." European government bonds with short remaining maturities are also being bought, according to Gregor Daniel of Walter Ludwig Wertpapierhandelsbank. "These are used as a time deposit alternative, such as bonds from Belgium or Ireland." As an example, he cites a Belgium government bond maturing in 2026, which currently yields 3.04 percent (BE0000337460).
Daniel
Corporate bond carrier trading
Things are quiet in corporate bond trading. Marcus Mielert of Oddo BHF speaks of the "summer hole" with little news and little turnover. "Quarterly figures, for example from Lufthansa or Baywa, also have no effect," reports Daniel. Some around in both directions go in the mid-July issued bond of DEAG Deutsche Entertainment (NO0012487596). Brunner reports good turnover at low prices for bonds issued by insolvent The Social Chain (<DE000A3E5FE7>), known from "Die Höhle der Löwen." The company is currently attempting to restructure on its own. According to Brunner, the favorite of investors among the U.S. dollar bonds is the bond of agricultural machinery manufacturer John Deere (US24422ETT63), which matures in June 2024. It currently offers a yield of 5.48 percent.
Fund liquidation causes problems for SME bonds
Real estate bonds continue to weaken. Today, Germany's largest residential real estate group Vonovia reported another billion-dollar loss for the second quarter. Even paper from companies without negative headlines remains under pressure, as Daniel notes, such as from FCR Immobilien (<DE000A2TSB16>). "The liquidation of the German Mittelstand Bond Fund (LU0974225590) is causing nervousness and, in some cases, sharp price swings," notes Brunner. This week, he says, it hit Groß & Partner Grundstücksentwicklungsgesellschaft (DE000A254N04). The share price fell from 63 percent to a low of 51 percent, and is currently back at 57 percent.
Brunner
However, some mid-market bonds continue to trade above par, Daniel notes: These include bonds from PNE at 5 percent through 2027 (DE000A30VJW3), UBM Development at 7 percent through 2027 (AT0000A35FE2) and Karlsberg Brauerei at 4.25 percent through 2025 (DE000A254UR5). "Unfortunately, they're all revenue-less."
by: Anna-Maria Borse, 4 August 2023 © Deutsche Börse AG
Anna-Maria Borse is a finance and economics editor specializing in financial markets/stock markets and economic topics.
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