Global Bonds Gain $132 Billion as Stock Rout Cuts $7.8 Trillion

Bloomberg

By Sarah McDonald - Aug 9, 2011

The worldwide retreat from stocks and commodities following Standard & Poor’s unprecedented cut of the U.S. AAA credit rating has driven the value of the global bond market to a record high.

The market value of Bank of America Merrill Lynch’s Global Broad Market Index has increased $132.4 billion since the end of July to $42.1 trillion, the most in data going back to 1996. The index, containing more than 19,000 bonds sold by governments, banks and the world’s biggest companies, returned 1.09 percent this month as yesterday’s stock rout wiped out about $2.5 trillion in global equity values, extending total losses since July 26 to $7.8 trillion.

While S&P said the credit worthiness of the U.S. was diminished when it cut the rating to AA+ on Aug. 5, Treasuries have surged. The yield on the benchmark 10-year note dropped today to as low as 2.27 percent, the least since January 2009. Investors are seeking the safest assets amid growing concern that debt crises in the U.S. and Europe and a manufacturing growth slowdown in the world’s two biggest economies may cause the global recovery to falter.

“The S&P downgrade of the U.S. has shocked markets, particularly the equity markets, where we’ve seen an absolute bloodbath,” said Jarrod Kerr, director of Australia and New Zealand rates strategy at Credit Suisse Group AG in Singapore. “The downgrade has had the opposite effect on Treasuries where you’ve seen a hell of a rally.”

Sovereign Debt

Treasuries have gained 2 percent since July 31, Merrill Lynch index data show, and 30-year yields dropped to as low as 3.64 percent, the least in 11 months. The Federal Reserve will meet today to review monetary policy amid speculation it will introduce new measures to boost financial confidence.

S&P lowered the U.S.’s long-term rating one level after markets closed on Aug. 5 and kept the outlook at “negative,” saying it was becoming less confident in policy makers’ abilities to tackle the budget deficit.

Global sovereign bonds have returned 1.4 percent in August, Merrill Lynch indexes show. The average yield on the Global Sovereign Broad Market Plus index of 1236 securities has slumped to 1.9 percent, the lowest since November.

All stocks in the Standard & Poor’s 500 Index retreated for the first time since at least 1996 yesterday and the index fell 6.7 percent, its worst one-day decline since December 2008.

Falling Default Rate

The Standard & Poor’s GSCI index of 24 commodities slumped as much as 3.6 percent today to 598.46, the lowest level since December. European stocks slid for a seventh day, pushing the Stoxx Europe 600 Index down 21 percent from its February high and into a so-called bear market, on concern the U.S. downgrade and the region’s credit crisis will lead to a global recession.

“The weakening market and economic conditions increase the likelihood of meaningful political responses,” in the U.S. and Europe, Deutsche Bank AG analysts Gus Medeiros and Colin Tan wrote in a note to clients today. “An efficient response from the political system should meaningfully reduce sovereign risks and improve sentiment in the corporate world, which remains in good shape.”

The global corporate default rate fell to 1.9 percent in July, from 5.5 percent a year ago, and will end the year at 1.5 percent, according to a report by Moody’s Investors Service yesterday. Companies had a record $1.91 trillion in cash and other liquid assets at the end of the first quarter, up from $1.39 trillion two years earlier, Fed data show.

Corporate Bonds

The market value of more than 4,700 investment-grade U.S. dollar bonds sold by firms from Apache Corp. to Xerox Corp. has increased by $32.6 billion this month to $3.8 trillion, the Merrill Lynch U.S. Corporate Master index shows.

The yield premium investors demand to hold to own the debt instead of government securities surged 16 basis points yesterday to 190, the highest since last September, the data show.

Relative yields on global junk bonds soared to the most in more than a year, with spreads expanding 125 basis points to 692 this month. The market value of the Global High Yield Index has dropped $51.2 billion this month to $1.27 trillion, the Merrill Lynch indexes show.

“We are reducing holdings of credit as much as possible,” said Tadashi Matsukawa, head of fixed income in Tokyo at PineBridge Investments Japan Co. “No one wants to go out without an umbrella knowing there will be a storm.”

To contact the reporter on this story: Sarah McDonald in Sydney at smcdonald23@bloomberg.net.