July 16, 2024

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Why corporate bonds are so hot right now

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Everyone seems to love corporate bonds these days. Maybe a little too much.

Demand for the asset class has been extremely robust. Excluding a blip earlier this month, there have been net inflows to credit funds for more than 30 weeks rolling, as investors of all stripes rush to get their hands on the juicy yields on offer in the era of higher-for-longer benchmark interest rates.

Even solid companies are issuing debt with high returns — not great news perhaps for them, but good for investors. And on the whole, it does not appear that companies are struggling with their debt burden.

The New York Fed’s corporate bond distress index has collapsed. Some individual horror stories are still out there but that’s par for the course in corporate debt and broadly, there just is no notable distress. Happy days.

But corporate bond investors are generally a pretty dour bunch, trained to think about what can go wrong. So there’s a good amount of whining in these circles that because of all that demand, yield spreads — the pick-up awarded to investors when they put money at risk with corporate borrowers rather than with governments — have become unusually slender. 

US corporate debt with maturity around 10 years now offers some 1.5 percentage point more in yield than the government debt benchmark. It is typically closer to 2 points — a big difference in this market. Counter-intuitively, in both Europe and the US, the longer you look in terms of maturities, the less relative reward you receive. 

Some investors don’t feel properly compensated for the risk. “The market is broadly expensive,” said David Knee, co-deputy chief investment officer for fixed income at M&G Investments in London at a recent event. “It’s difficult to find anything that looks really compelling value.” Why bother doing all that homework on a company and how likely…

2024-06-21 15:00:41

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