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World-renowned Hedge Funds pour Money to buy Cheap Corporate Bonds



World-renowned hedge funds are actively hunting for cheap goods in the corporate bond market with high yield but has a lower credit rating than investment level particularly and corporate bonds generally with believes that the wave of sell-off caused by the gloomy world economic outlook has gone too far.

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World-renowned hedge funds are actively hunting for cheap goods in the corporate bond market with high yield but has a lower credit rating than investment level particularly and corporate bonds generally with believes that the wave of sell-off caused by the gloomy world economic outlook has gone too far.

The corporate bond market hits hard in 2022 due to concerns that a sharp increase in borrowing costs will lead to a wave of defaults at businesses that have grown thanks to the cheap money period.  Interest rates for risky borrowers have increased sharply.

However, some fund managers, such as Daniel Loeb of Third Point, Paul Singer of Elliott Management and Sir Michael Hintze of CQS, believe that some segments of the bond market have fallen too far for default risk, so some funds have started buying.

World-renowned Hedge Funds pour Money to buy Cheap Corporate Bonds

Yields on speculative bonds rose from 2.8% in early 2022 to 7.8% recently, according to the high-yield EUR-denominated bond index Ice Data Services.

In Europe, high-yield corporate bond funds saw an outflow of EUR 12.7 billion in the first 10 months of this year, or more than 15% of their assets.  Investment-graded corporate bond funds were also withdrawn 25.2 billion euros, according to JPMorgan data.

Much of that outflow is invested in passive ETFs which track multiple bond indexes.  And when investors sell out, these funds also have to sell a bunch of bonds.

Overall, US high-yield bond ETFs saw a net draw of $17.1 billion in the first nine months of this year, according to ETFGI data.

A survey by the French Bank BNP Paribas of investors managing more than $380 billion in hedge fund assets, shows that it plans to increase capital allocation to bond funds in all sectors, of which US funds are the most popular.

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Some industry insiders have also argued that while defaults are expected to increase, the situation may not be as it has been in some previous crises.

In Europe's high-yield corporate bond market, ratings agency S&P predicts that default rates will rise from the current level of 1.4% to 3% by the middle of next year, or 5% in a more pessimistic scenario, however all are lower than 9% in 2008. Fitch expects that this figure will be 2.5% in 2023.

In the US, Fitch expects that default rates will be 2.5-3.5% by the end of next year and 3-4% by 2024. This is lower than the 21-year historical average level of 3.8% and 5.2% in the 2020s with the happening of the Covid-19 pandemic.  S&P predicts that this figure will be 3.5% by the middle of next year.

World-renowned Hedge Funds pour Money to buy Cheap Corporate Bonds

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