Company borrowing costs jumped the most in two weeks after Germany’s short-selling ban, wiping out declines triggered by Europe’s $1 trillion aid package that was meant to halt contagion from the sovereign debt crisis.
The yield premium investors demand to hold investment-grade bonds rather than similar-maturity government debt rose 5 basis points to 177, the highest this year, and equal to the level before the emergency loan was agreed May 10, Bank of America Merrill Lynch index data show. Spreads on high-yield notes widened 16 basis points to 675, the most since March 2.
“What investors need most of all is security and predictability, but they are getting ever less,” said Ciaran O’Hagan, a strategist at Societe Generale SA in Paris. “Instead they are vilified as sharks, wolves or locusts, while governments rack up ever higher debt and contingent liabilities.”
Germany’s unilateral ban on so-called naked short-selling of some bank stock and the outlawing of speculation on government bonds using credit-default swaps has shaken investor confidence. German two-year notes declined today on concern that the lack of a united platform from European lawmakers will prompt investors to move assets to other markets.
Investment-grade spreads in Europe are within one basis point of where they were on May 7, gaining 8 basis points to 185 basis points, according to the Bank of America Merrill Lynch indexes. Junk bond spreads rose 34 basis points to 762 basis points, matching the May 7 level and the most since March 2.
Demand freeze
“There’s been a freeze in demand for risk assets,” said Simon Ballard, a strategist at Royal Bank of Canada in London. “The credit market is like a rabbit caught in the headlights.”
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Bond issuance in Europe is the slowest on record this week, with ¤520 million ($644 million) of notes sold, according to data compiled by Bloomberg. Globally, $9.1 billion of corporate bonds have been sold, the slowest week of the year.
German Chancellor Angela Merkel’s unilateral effort to control what she called “destructive” markets came 10 days after voters angry at aid for Greece dealt her an electoral setback that cost her control of the federal upper house of Parliament. She’s now trying to win support for Germany’s share of the loan package, due to go to a parliamentary vote tomorrow.
France, the Netherlands and Finland said they have no plans to implement similar measures, leaving Merkel isolated.
“One thing the markets really don’t like is political interference, and that’s what the German announcement smacked of,” said Tim Barker, head of credit research at Aviva Investors in London. “Investors are trying to come to terms with political uncertainty.”
Short sellers borrow assets and sell them, betting the price will fall, seeking to buy them later and pocket the difference. In naked short-selling, traders never borrow the assets, so betting is unlimited.
High-yield, of junk, debt is ranked below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s.
Merkel makes case to markets
Chancellor Angela Merkel reached out to financial markets ahead of tomorrow’s vote on Germany’s share of a $1 trillion euro bailout, saying she needs “honest” advice as her government presses for tougher global regulation. Merkel, speaking at a Berlin conference on financial rules after enacting a unilateral ban on some types of naked short-selling, said that she has to balance voter concerns with investors’ “understandable” desire for profit.