Investors dive into high-quality US corporate debt once more
Latest stretch of inflows extends a hot streak that now runs to 28 consecutive weeks
Investors have upped their bets on high-quality corporate debt in the US, as dovish central banks and nagging concerns over global growth appear to make the sector an ideal place for refuge.
Flows into US “investment grade” bond funds came to $600m for the week ending Wednesday, bringing the total to $62bn for the year, according to EPFR Global data. The latest seven-day stretch of investor inflows extends a hot streak for the sector that began in October and now runs to 28 consecutive weeks.
High-quality corporate bonds, rated at least triple-B by credit rating agencies, have emerged as a sweet spot for investors. By buying the safe-seeming debt of the world’s largest companies, investors can hedge against the threat of a slowdown in global growth while reaping returns from a very strong start to the year for asset prices.
“There is really nowhere else to go,” said Fraser Lundie, head of credit for Hermes Investment Management in London. He noted that corporate debt became more attractive as the difference in the yield offered by government bonds compared with companies’ bonds — the “spread” in industry jargon — widened as a result of central banks’ keeping interest rates low.
Fears that developed countries will grow at a slower pace has triggered a recent push among central banks toward more accommodative monetary policy, which has bolstered bond prices around the world. The Federal Reserve led the dovish push in January with a pivot away from hiking interest rates after a dramatic fourth-quarter sell-off in the stock market. Now, the top band of the Fed’s target funding rate is 2.5 per cent, while the European Central Bank’s deposit rate sits at minus 0.4 per cent, increasing the allure of corporate bonds.
Investors that have dived into US corporate debt this year have been rewarded. High quality US bonds returned 5.14 per cent in the first quarter while US high-yield bonds have returned 7.26 per cent — the best three-month stretch for both asset classes since 2009.
“People are trying to earn yield — given the depth of liquidity in the US investment grade bond market, you can’t ignore it,” said Scott Freedman, head of credit for Insight Investment Management in London. “As growth slows, spreads are more vulnerable. We’re not calling for a recession …but weaker growth means wider spreads.”
The same EPFR data showed that US high-yield bonds (rated below triple-B) attracted $64m for the week, bringing the total that has flowed into the sector to $15.9bn for the year. That suggests that investors have grown more comfortable with the credit profile of such borrowers — and also those triple B-rated borrowers on the lowest rung of investment grade.
“Triple-B risks were overplayed,” said Mr Lundie, pointing to Ford, GM and GE as companies with triple-B rated debt that have recently sought to allay investor worries by cutting leverage. “They have heard from investors about these fears and have responded by strengthening their balance sheets.”