Finance联社 September 29th News (Editor Xiaoxiang) In a once extremely bleak corner of the debt market, it has now transformed into one of the biggest winners in the global financial market this year, bringing returns rarely seen in decades.

Mixed bonds are one of the riskiest types of real estate corporate bonds, with an overall return rate exceeding 75% this year. Among a series of products known as subordinated bonds, the top 10 bonds have a return rate of about 170% during this period, even higher by 20 percentage points than the annual return rate of the unquestionably favored 'darling' - Nvidia - in the AI ​​boom.

This rapid market reversal was hardly foreseen by anyone, especially at a time when global property owners are feeling pressure due to rising interest rates and changes in work habits after the epidemic.

However, today, real estate debt has actually become a major early winner that central banks are prioritizing to boost the economy rather than fight declining inflation.

Andrea Seminara, CEO of Redhedge Asset Management based in London, said, 'In my career, I don't remember a situation like this occurring.'

Seminara began working in the financial industry during the most severe period of the 2008 global financial crisis. He said, 'Considering the difficulties faced in this area earlier, the magnitude of the current returns is unprecedented.'

Bottoming out real estate subordinated ​bonds

Subordinated bonds refer to debts with lower repayment priority in the event of a company's bankruptcy. This means that if a company's finances deteriorate, holders of subordinated bonds can only be repaid after senior debt holders. The collapse of subordinated bonds was one of the main reasons for the 2008 financial crisis. At that time, many investors and financial institutions failed to fully evaluate the risks, leading to a chain reaction in the credit market, ultimately triggering a global economic recession.

After global central banks began to raise interest rates in 2022, subordinated bonds in the real estate sector also experienced a sharp decline of nearly 50%. Higher borrowing costs mean soaring costs of alternative debt, causing investors to worry about indefinite delays in repayment. Some companies may also choose to skip interest payments on bonds without triggering default, making these bonds increasingly unpopular among investors.

Andreas Meyer, founder of Fountain Square Asset Management company based in Hamburg, Germany, stated that these bonds have been punished in recent years due to technical factors. The sector is a bloodbath.

For Seminara, buying at a low price is actually a bet that these companies will be able to refinance the debt that is about to mature, and decreasing inflation will allow central banks to lower interest rates.

As a matter of fact, both of these points have been confirmed.

Due to capital inflows into the credit market, the so-called "maturity wall" faced by these debt-issuing companies collapsed in a historic manner this year, allowing them to issue new bonds to finance the repayment of old debts. Meanwhile, the Federal Reserve this month joined the ranks of the European Central Bank and the Bank of England in easing monetary policy, cutting interest rates by 50 basis points at once and leaving the possibility of further substantial rate cuts.

One of the funds benefiting from Meyer's event-driven fund is the hybrid bond, with a yield as high as 80%. He still maintains investment in this area.

Risk still exists.

Of course, one of the main risks currently faced by the bond sector is that the profit margins of related trades may be limited.

Bank of America's strategist Barnaby Martin and Ioannis Angelakis pointed out in a report last week that the valuation of real estate credit is 'clearly approaching saturation'.

Nevertheless, many buyers and sellers remain confident in the commercial real estate market's bottom-up recovery. Many hope to invest capital when interest rate pressure begins to ease.

"We have just experienced a storm. No one has experienced such aggressive monetary policy," said Ron Dickerman, founder of commercial real estate securities firm Madison Realty Capital. "Although a few rate cuts alone cannot create a market, there is clearly optimistic sentiment in the market."