Bond spreads collapse as investors rush into corporate debt –

Premiums above the ultra-safe US Treasuries that investors are demanding to buy corporate debt have fallen to their lowest levels in more than a decade.

The collapse of yield (or spread) differences is caused by investors Growing more and more I am convinced that the recent rise in inflation will not hinder the rapid economic recovery.

Yield spreads between the US Treasury and corporate bonds narrowed significantly this year as investors confidently demanded that they own slightly higher-yielding assets in a low-return world.

Its spread compression, which indicates the level of risk investors see in lending to businesses compared to the US government, was under pressure from concerns about high inflation from mid-April to May.

However, with the economic resumption after the pandemic, inflation is temporary, and investors are increasing in the Fed’s mantra to push down expectations of inflation.

Adrian Miller, Chief Market Strategist at Concise Capital Management, said: “After all, corporate bond investors are more focused on the strong growth paths expected.”

Confidence in the economic recovery on Wednesday was further strengthened. Federal Reserve Board signaled A shift to the final abolition of crisis policy measures, incorporating a more optimistic outlook for the US rebound. More hawkish tone from Federal Reserve Chairman Jay Powell has left inflation out of control, including the Fed’s comment that “price stability is half our mission” and the central bank. It helped to alleviate concerns that could force a more sudden response from.

Spreads between US Treasury yields and investment-eligible corporate bond yields fell 0.02 points to 0.87% on Wednesday, the lowest since 2007, and remained unchanged on Thursday, according to ICE BofA Indices. For low-rated, and therefore high-risk, high-yield bonds, spreads fell 0.05 points to 3.12 percent. Less than The post-crisis lows were last set in October 2018. It gradually expanded to 3.15% on Thursday.

Spread declines have been supported by central bank easing policies through the pandemic crisis and the federal government’s trillion-dollar pandemic aid package. According to a popular index run by Goldman Sachs, the US financial position is close to the simplest on record, spurring a wave of corporate borrowing by high-risk junk-rated companies.

About 373 junk-rated companies have borrowed through the US corporate bond market of about $ 11 trillion so far this year. American Airlines And cruise operator carnival.. According to data provider Refinitiv, the high-risk cohort raised a total of $ 277 billion, up 60% from previous year’s levels at a record pace.

A vertical bar graph of annual revenue on high yield US corporate bond sales ($ 1 billion) showing that high-risk junk-rated U.S. companies are issuing debt at a record pace.

However, lower spreads and investor risk perceptions were not enough to outweigh the overall rise in yields. Yields were shaken significantly by the outlook for rising interest rates as investors adapted to the faster pace of policy tightening from the Fed.

Higher-rated debt, which is safer but has less spreads to cushion investors against Treasury yield spikes, tends to suffer more in a high-growth, rising interest rate environment. High-yield bonds, on the other hand, tend to benefit and are less likely to go bankrupt due to a booming economy.

Andrey Skiva, US Credit Head of Blue Bay Asset Management, said: “The company is doing very well and profits are recovering significantly.”

High-yield bonds fell 0.27 points to 3.97%, while investment grade bond yields rose 0.3 points to 2.08% from the beginning of the year.

Bank of America analysts predict that investment-grade bond spreads will widen to 1.25% and high-yield bond spreads will continue to fall to 3.00% in the coming months, and the two markets will continue to approach. doing.

However, while there are many optimistic views on the US recovery, continued enthusiasm for low-quality corporate debt has caused astonishment in some regions. Investors are worried that volatile companies are being offered credit at interest rates that do not consider high levels of risk.

“It is very important for us that the yields we receive on high yield bonds provide the right level of compensation for the credit risk of our investments,” said RhysDavies, Invesco’s High Yield Portfolio Manager. “It’s very simple. The lower the yield in a high-yield market, the more carefully investors need to navigate the market.”

Bond spreads collapse as investors rush into corporate debt Source link Bond spreads collapse as investors rush into corporate debt