Investors Accepting Smallest Premium Over Treasuries
Low Returns Driving Investors to Corporate Bonds
Investors are willing to accept the smallest corporate bond yields when compared to U.S. Treasuries in a race to find returns.
A Bloomberg yield analysis shows that corporate bond yield spread over Treasuries is the narrowest in a year, meaning that investors aren’t seeking too much of a premium when making decisions to invest in risky corporate debt or risk-free government bonds.
“We’re seeing significant opportunity in credit markets,” said Mark Kiesel, Pimco’s chief investment officer for global credit. “You’re looking at very low yields across the world, and investors will have to look to other assets other than government bonds.” (Source: “Treasuries Fall Behind Company Debt as Pimco Pursues Credit,” Bloomberg News, August 15, 2016.)
With the current a low-interest-rate environment, with the benchmark bond yields in the U.S. near their record lows and trading below zero in Germany and Japan, investors have been forced to look for other investment avenues.
Going by a Bank of America Corp. index of investment-grade and high-yield securities, investors are willing to accept even a meager 216 basis points of extra yield to purchase corporate debt instead of Treasuries, making for the smallest spread in over a year. (Source: Ibid.)
Investors in government bonds have earned 5.4% yield in 2016 through August 12, according to the Bloomberg U.S. Treasury Bond Index. Similarly, investment-grade corporate bonds gave investors a 9.2% return (Source: Ibid.)
U.S. government bonds rose on August 12 after weak retail sales data strengthened expectations that the Federal Reserve won’t raise interest rates until December at the earliest.
Before their next meeting on interest rates, the Federal Reserve officials are looking for sings whether the economic strength which they noted so far this year has a sustained momentum. The Federal Reserve raised its benchmark interest rate last December for the first time in almost 10 years as the economy recovered from subprime crisis in 2008.
The Treasury 10-year note yield was trading at 1.54% this morning, according to Bloomberg Bond Trader data. The price of the 1.5% bond due in August 2026 was 99 20/32. Last month, the yield decreased to a record 1.318%.
In a separate report, the Wall Street Journal reported that yield-hungry investors are moving their funds to emerging markets which is helping asset prices to swell in more risky investment destinations. (Source: “Bond Funds Turn to Emerging Markets,” The Wall Street Journal, August 15, 2016.)
These investments are led by International bond funds such as BlackRock Inc., Legg Mason Inc., and Oppenheimer Funds, a shift that reflects how desperate “big money” managers are to find extra return for their investors. (Source: Ibid.)