LONDON: The sterling bond market is flashing red, with double-digit losses and borrowers put to flight.

       That’s alarming for firms that need cash. They’re up against the Bank of England’s (BoE) rate rises, a cost-of-living crisis with inflation at the highest in 40 years and the slow-burning legacy of low productivity.

       And then there’s the added fallout from Brexit. All in, Bloomberg Economics expects the economy to shrink 0.4% this quarter.

       “It makes for a pretty tough set up,” said Justin Jewell, a high-yield portfolio manager at BlueBay Asset Management LLP.

       “The sterling market has been a bit unloved this year partly because of BoE rate hikes and partly because the UK economic outlook is looking the weakest out of the major economies.”

       A Bloomberg index that tracks top-rated sterling securities, the bulk of which belong to companies based in the UK, has fallen 11% this year as last Thursday, two percentage points more than euro-denominated debt.

       The gauge’s market capitalisation has shrunk ￡38bil (US$48bil or RM210.2bil), the worst year-to-date contraction since at least 2000, which is as far back as the data goes.

       On top of that, the market for new sterling corporate bonds, which is much smaller than its euro and dollar peers, has virtually ground to a halt.

       Issuance by UK-based, non-financial firms in 2022 is just ￡3.78bil (RM21bil), the lowest since 2016 and a third of what was sold this time last year.

       Companies such as Matalan Ltd are having to rethink their capital structure, and funding mergers and acquisitions is becoming tricky and expensive.

       “UK corporates that need liquidity and are struggling with the inflationary environment may struggle to service their debts or raise more capital or keep their businesses going,” said Zachary Swabe, a portfolio manager at UBS Asset Management.

       “As sterling issuers refinance they will be forced to pay higher coupons, in some cases double and in others, even triple.”

       That’s because borrowing costs have soared this year, with the yield on sterling high-grade company bonds skyrocketing about 160 basis points to 3.66% in May, the highest since 2016, according to a Bloomberg index.

       Yields are almost a percentage point above their 10-year average.

       A deep dive into the gauge shows all the bonds that can be measured on a year-to-date basis are down in 2022.

       The biggest losers are some consumer credits, which dropped an average of 13%. — Bloomberg