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.
A total of $19 billion (€17.75 billion) has poured into funds that buy investment grade corporate debt around the world since the start of 2023, the most at this point in the year, data from fund flow tracker EPFR shows.
The cash flooding into the asset class underlines investors’ eagerness to lock in historically high yields provided by the safest corporate debt after a bruising sell-off last year, and the fact that they no longer need to push into riskier corners of the credit market in search of decent returns.
“People basically think that fixed income in general looks a lot more attractive than it has in prior years,” said Matt Mish, head of credit strategy at UBS.
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“The euphoria around investment grade is basically more broadly this euphoria around yields,” he said. “At least relative to last year and really relative to most of the last decade, [high-grade corporate debt] is offering yields that are considerably higher.”
Average US investment grade yields have climbed to 5.45 per cent from 3.1 per cent a year ago, having late last year touched their highest level since 2009. The bulk of that rise reflected a broad fixed income sell-off over the past year as the Federal Reserve – like other big central banks – rapidly lifted interest rates in an attempt to snuff out sky-high inflation.
Yields have also leapt on more speculative junk-rated debt, but many fund managers say they prefer to stick with debt issued by companies better-placed to weather a potential economic downturn as higher interest rates slow the economy.
“Clients are looking at investment-grade first,” said Christian Hantel, portfolio manager at Vontobel Asset Management. “They are pretty cautious after having their fingers burnt last year.”
“They like to allocate to more risky assets but they are not ready to go all-in,” he said.
The current environment means “we don’t need to challenge ourselves in liquidity or on credit quality”, said Henrietta Pacquement, head of global fixed income at Allspring Global Investments.
Conditions this year have created a window for companies to launch a borrowing spree, with more than $182 billion in proceeds from US investment-grade deals alone, according to data from Refinitiv. This week pharmaceuticals giant Amgen tapped the market with a $24 billion sale to fund the buyout of Horizon Therapeutics.
By comparison, December US investment-grade issuance stood at just under $7 billion, with the number of new deals sliding by a third in the second half of the year. In Europe high-grade issuance has reached $246 billion so far in 2023 – the best start to the year since 2012.
Still, a recent run of strong economic data in the US, along with signs that inflation is still stubbornly high, could stifle the recent enthusiasm as investors brace for further tightening from the Fed.
UBS’s Mr Mish said the widespread assumption that bond markets had hit “peak yields” has been challenged in recent days.
Futures markets are now reflecting bets of fewer than one US interest rate cut in 2023, having previously predicted that the Fed would lower borrowing costs twice by December after a peak in the summer.
Goldman Sachs has already turned “slightly bearish on high-quality US corporate bonds,” analysts at the bank wrote this week, pointing to the “re-emergence of cash as a competing and rewarding alternative”.
“The easy money has already been made,” said chief credit strategist Lotfi Karoui. – Copyright The Financial Times Limited 2023
