Bond investors already betting on return to normal life amid vaccine optimism

By Tasos Vossos


It wasn’t so long ago that airliners and real estate companies were asking for emergency support and precautionary bank loans. Now investors are desperate to lend them money.

Bonds of EasyJet Plc and U.K. property manager Hammerson Plc are among the best performers in Europe this year. Investment-grade companies in the two sectors have sold almost $22 billion of debt in euros and sterling, the fastest pace of year-to-date issuance since at least 2010.

Money managers are betting that vaccine rollouts in the U.K. and U.S. will allow a return to normal life by the summer, even as much of Europe suffers under a third wave of the pandemic. Notes of the virus-battered companies also offer good value after central bank bond-buying pushed down corporate yields.

“Fundamentally there is a very good reason investors are getting behind these stories,” said Andreas Michalitsianos, a portfolio manager at JPMorgan Asset Management, which oversees $2.3 trillion. “In most cases, they aren’t going to default, they aren’t going to become high yield and their business models aren’t fundamentally broken.”

Michalitsianos is looking to buy up laggards with the hope that they will keep closing the gap with the broader market. Yields on Easyjet’s 2025 notes are more than 100 basis points higher than the index. Bonds of real estate firm Kennedy-Wilson Holdings, Inc. and bus operator FirstGroup Plc also trade at a premium despite a rally this year.

Others warn that the optimism is unsustainable as a successful vaccine rollout doesn’t necessarily equate to the return of pre-pandemic work and travel habits.

Sectors like travel and real estate could suffer from “longer term structural demand shortages,” prompting investors to ask for higher compensation to own them, said James Vokins, head of U.K. investment grade credit at Aviva Investors.

Last year, companies worldwide borrowed more than $430 billion of new loans and used at least $340 billion of existing credit lines to weather the pandemic. Some travel and leisure companies were lining up new financing deals as recently as January.

The prospective reopening also boosts the outlook for inflation, pushing government bond yields higher and sinking the total return of corporate bond indexes. So far, investors have responded by ditching interest rate risk while boosting credit exposure ahead of economies getting back to normal.

Finding cheap bonds is becoming a necessity as spreads in the broader European investment-grade market have struggled to tighten further than the pre-pandemic levels reached at the end of 2020.

In the U.K., where the vaccination program is more advanced compared to other major economies, the government has set June 21 as the earliest date when all restrictions in England will end.

“There is still value in the sectors that suffered last year and we are positioned for their recovery,” said Serena Galestian, a money manager at Insight Investment in London, which oversees 753 billion pounds ($1 trillion). “Given the pace of vaccine rollout, at least in the U.S. and U.K, we can now see the path to normality.”