Volatility Slams the Brakes on Capital Raising
Global capital markets are reeling under the volatility brought about by the U.S. Federal Reserve's plans to wind down its monetary stimulus in the coming months.
While the global IPO (initial public offering) market is witnessing a pull back, bond market activity is currently at year-to-date lows as investors weigh the consequences of the Fed tapering.
For example, global debt markets saw only 213 deals in the week ended June 21 2013, the lowest year-to-date, according to global deal tracking firm Dealogic. The value of bond issuances stood at $66.7 billion - the third lowest so far this year.
"Bond market volatility is an immediate deterrent to debt issuance because companies cannot predict what the cost is going to be on issuing debt," Uwe Parpart, head of research at Reorient Financial Markets told CNBC on Monday.
Yields on U.S. Treasurys, which are used as a benchmark for pricing corporate debt, have since risen rapidly since May. 10-year Treasury yields have climbed, for example, from 1.62 percent to 2.52 percent currently.
The high yield debt space has taken a notable hit, with volume falling to $3 billion - the lowest since the first week of the year, which is typically a slower period for capital raising.
(Read More: Record Outflows FromUS Junk Bond Funds)
Junk bond issuances have boomed over the past year as companies took advantage of cheap borrowing costs alongside increased risk appetite. However, high-yield bonds are falling out of favor as an end to the Fed's quantitative easing (QE) is expected to be followed by a rise in interest rates from record low levels, which would be negative for the price of bonds.
In the week ended June 12, investors pulled $6.48 billion out of high-yield bond funds, according to fund flow tracker EPFR, the second highest withdrawal since the company began tracking the funds in 2003.
(Read More: Junk Bond Volume Piling Up, but Trouble Lurks)
Reflecting risk aversion among bond investors, Kumar Palghat, founder and director of Kapstream, which runs fixed income funds, told CNBC that the firm has increased cash in their portfolio to 15 percent from 5 percent.
"The most difficult part about managing a bond portfolio now is you know the Fed has said they will start tapering off QE. We know the rate hike is a little further away in 2014-2015, but the market is going to anticipate the Fed at some point to start raising rates," Palghat said.
(Read More: Bond Losses of $1 Trillion if Yields Spike, BIS Says)
The IPO market is also beginning to feel the pain with the U.S. seeing the highest number of equity deals being withdrawn or postponed last week, according to Dealogic, year-to-date.
Brazil's largest cement producer Votorantim Cimentos, for example, canceled its $3.46 billion IPO last week - the largest-ever IPO to be withdrawn or postponed in the U.S. - due to unfavorable market conditions.
Even in Asia, Hong Kong's IPO market is softening with casino operator Macau Legend Development considering cutting its fundraising size by almost half, according to Wall Street Journal, which also reported that hotel trust New World Development is delaying taking orders for its $1 billion IPO.
"When you have a bear market type of situation, people are withdrawing into cash and are reluctant to commit to anything. For an IPO this is the worst possible situation," said Parpart.
Global equity markets suffered a broad-based selloff last week following the Federal Open Market Committee meeting in which Chairman Ben Bernanke said the central bank could begin to cut back on bond purchases "later this year," if incoming data are consistent with its forecasts.
"You do not want to do an IPO when volumes are low and when the market is likely to continue dropping. It might just go belly up," he added.
By CNBC's Ansuya Harjani