Bank debt is making investors nervous

Pulling Hair

Last year’s sure thing in credit markets is quickly becoming this year’s nightmare for bond investors.

Bloomberg News reports that the riskiest European bank debt generated returns of about 8% last year, according to Bank of America Merrill Lynch index data, beating every type of credit investment globally. In less than six weeks this year, those gains have been all but wiped out, even after interest payments.

Investors are increasingly concerned that weak earnings and a global market rout will make it harder for banks to pay the interest on at least some of these securities, or to buy them back as soon as investors had hoped. The bonds allow banks to skip interest payments without defaulting, and they turn into equity in times of stress. Deutsche Bank may struggle to pay the interest on these securities next year, a report from independent research firm CreditSights earlier on Monday said. The bank took the unusual step of saying that it has enough capacity to pay coupons for the next two years.

'The worries about these bonds represent real fears that the European banking system may be weaker and more vulnerable to slowing growth than a lot of people originally thought', said Gary Herbert, a fund manager at Brandywine Global Investment Management, which oversees about $69bn in global fixed-income assets. 'It’s the epicentre of growth concerns globally. And it doesn’t look pretty', he added.

To access the complete Bloomberg News article hit the link below:

The $102 Billion of Bank Debt That's Making Investors Nervous

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