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    Home»Business News»Bond spreads collapse as investors flock to corporate debt
    Business News

    Bond spreads collapse as investors flock to corporate debt

    eduardo_alves38By eduardo_alves38June 18, 2021Updated:June 18, 2021No Comments4 Mins Read
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    The premium between corporate debt and U.S. Treasuries has fallen to its lowest level in more than a decade, a sign that investors are increasingly confident that recent increases in inflation will not hamper the market. economic recovery.

    The collapse of the difference in investment returns – known as the spread – means buyers are demanding a much lower premium than before for holding corporate debt, which is riskier than bonds. Super safe US treasury.

    The spreads between yields on US Treasury bonds and corporate bonds have tightened significantly this year, as investors gained confidence and loudly clamored for holding even slightly higher yielding assets in a low world. yield.

    This spread compression, which indicates the level of risk investors see in corporate lending relative to the US government, had come under pressure from the specter of higher inflation from mid-April to May.

    However, a growing number of investors are embracing the Fed’s mantra that price increases will prove transient as the economy reopens after the pandemic, pushing measures of expected inflation down.

    “The Fed has controlled the transitional narrative that gave confidence to corporate bond investors,” said Adrian Miller, chief market strategist at Concise Capital Management. “After all, corporate bond investors are more focused on the expected strong growth path.”

    Confidence in the economic recovery strengthened further on Wednesday as Fed officials reported a shift towards the eventual repeal of crisis policy measures, embracing a more optimistic perspective of the US rebound. The more hawkish tone from Fed Chairman Jay Powell – including comments that “price stability is half of our tenure” at the Fed – helped allay concerns that inflation could spiral out of control, forcing a more brutal response from the central bank.

    The spread between US Treasury yields and investment grade corporate bond yields fell 0.02 percentage points to 0.87% on Wednesday, according to the ICE BofA indices, its lowest level since 2007, and remained unchanged on Thursday. For lower-rated – and therefore riskier – high yield bonds the spread fell 0.05 percentage point to 3.12 percent, below a post-crisis low last established in October 2018. It widened slightly to 3.15% on Thursday.

    The lower spreads were helped by the accommodative policies of the central bank during the pandemic crisis as well as by the federal government’s multibillion-dollar pandemic aid package. Financial conditions in the United States are near their easiest level on record, according to a popular index managed by Goldman Sachs, which has spurred a wave of corporate borrowing by riskier companies with junk ratings.

    Some 373 companies rated as garbage have borrowed nearly $ 11 billion in the U.S. corporate debt market so far this year, including companies hit hard by the pandemic like American Airlines and cruise line Carnival. Collectively, the risky cohort raised $ 277 billion, a record pace and up 60% from levels a year ago, according to data provider Refinitiv.

    Column chart of annual sales proceeds of US high yield corporate bonds (in billions of dollars) showing risky US companies rated as trash are issuing debt at an all time high

    However, falling spreads and investors’ perception of risk were not enough to offset an overall rise in yields, which were shaken by the prospect of rising interest rates as investors adjusted. at a faster pace of Fed policy tightening.

    Higher-rated debt securities, which are safer but offer less margin to protect investors against rising Treasury yields, tend to suffer more in high growth environments and rising interest rates. In contrast, high yield bonds tend to benefit, as the booming economy makes corporate bankruptcy less likely.

    “Right now, people are not at all concerned about the price action of rising yields,” said Andrzej Skiba, US credit manager at BlueBay Asset Management. “The companies are doing very well and we are seeing a clear recovery in profits. “

    Yields on investment grade bonds rose 0.3 percentage points to 2.08% year-to-date, compared with a decline of 0.27 percentage points to 3.97% for yield bonds Student.

    Bank of America analysts expect the two markets to continue to move closer, predicting that quality spreads will widen to 1.25% and high yield bond spreads will continue to decline to 3.00 % In the coming months.

    However, while optimism about the US recovery abounds, continued zeal for substandard corporate debt has caused dismay in some neighborhoods. Investors fear that insecure companies will be offered loans at interest rates that do not take into account the high levels of risk involved.

    “It is very important to us that the return we receive on a high yield bond provides an appropriate level of compensation for the credit risks associated with the investment. When yields are this low, it naturally becomes harder to tell, ”said Rhys Davies, high yield portfolio manager at Invesco. “It’s pretty straightforward – the lower the yield in the high yield market, the more cautious investors should navigate the market.”



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