Investor-grade markets are booming because of higher yields and concerns about riskier debt. Investors are piling into high-quality corporate bonds this year at a record rate, reflecting their enthusiasm for an asset class that is typically seen as relatively low risk but now offers the best returns in years.
According to EPFR data, $19bn was poured into funds that buy investment-grade corporate debt worldwide since 2023. This is the largest amount ever recorded at this time of the year.
Investors are eager to lock in historic high yields from corporate debt, which is the most secure after the bruising selloff last year. They also appreciate the fact that they don’t have to venture into more risky corners of the credit markets to get decent returns.
Matt Mish, UBS’ head of credit strategy, stated that people think fixed income looks more attractive than in previous years.
He said that the euphoria surrounding investment grades is more generalized than the euphoria about yields. “[High-grade corporate debt] offers yields that are significantly higher, at least relative to the past year and most of the decade.”
The average yield on US investment grade bonds has risen to 5.45 per cent from 3.1 per cent a year earlier, reaching its highest point since 2009. The majority of this rise was due to a wide-ranging fixed income sell-off in the US over the past year. In an effort to curb sky-high inflation, the Federal Reserve — along with other central banks — quickly raised interest rates.
Although yields have jumped on more speculative junk debt, many fund managers prefer to keep debt from companies that are better positioned to weather an economic downturn.
Christian Hantel, portfolio manager at Vontobel Asset Management, stated that clients are now looking for investment-grade products first. After having their fingers burned last year, they are now cautious.
He said, “They are willing to take on more risky assets, but they aren’t ready to do so all at once.”According to Henrietta Pacquement (head of global fixed income at Allspring Global Investments), “we don’t need to challenge ourselves on liquidity or credit quality” in the current environment.
According to Refinitiv data, companies have been able to borrow easily this year, as they have more than $182bn in US investment-grade deals. Amgen, a pharmaceutical giant, tapped the market this week with a $24bn sale to finance the purchase of Horizon Therapeutics.
Comparatively, US investment-grade issuance in December was just $7bn. The number of new deals fell by a third during the second half. Europe’s high-grade issuance reached $246bn in 2023, the highest level of issuance since 2012.
However, investors are preparing for more tightening by the Fed due to recent strong economic data in the USA and signs that inflation remains stubbornly high.
Mish, UBS’s chief economist, said that the assumption that bond markets have reached “peak yields” has been challenged by recent events.
Futures markets now reflect bets that there will be fewer than one US interest-rate cut in 2023. This is even though it was previously expected that the Fed would reduce borrowing costs by twice in December following a summer peak.
Analysts at Goldman Sachs have already become “slightly bearish” on US corporate bonds of high quality, according to this week’s bank report. They point out the “reemergence of cash as an alternative and more rewarding option.”
Lotfi Karoui, chief credit strategist, stated that “the easy money has already be made.”