Bond Market Turmoil Spares Corporate Debt as Apple Shows the Way
Friday, May 08, 2015 01:14 am
by Cordell Eddings and Sridhar Natarajan
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(Bloomberg) -- As the global bond market entered its worst slump in two years, investors that have been buying corporate debt at a record clip barely batted an eye.
AbbVie Inc., Apple Inc., and Royal Dutch Shell Plc led $62.7 billion of sales in the U.S. in what’s poised to be the third-busiest week of the year, according to data compiled by Bloomberg. While the average yield on bonds worldwide surged to the highest level this year, the extra yield investors demand to own corporate debt has narrowed, Bank of America Merrill Lynch index data show.
With few alternatives as central banks across the globe ply the financial system with cheap cash, money managers have been snapping up corporate bonds at a record pace. The buying continues even as the Federal Reserve prepares to raise its benchmark interest rate for the first time since 2006, a move that Chair Janet Yellen warned Wednesday may cause a “sharp jump” in yields.
“It’s very difficult to stay on the sidelines because the Fed has made it difficult to stay on the sidelines,” said Donald Ellenberger, who oversees about $10 billion as head of multi-sector strategies at Federated Investors in Pittsburgh. “That’s the whole point of aggressive monetary policy. We are getting closer to seeing what the other side of that looks like.”
Yield Drought
The easy-money policies adopted by central banks from the U.S. to Europe and Japan have fueled corporate-bond sales of more than $691 billion in the U.S. this year. That’s up 13 percent over the same period in 2014, when a record $1.57 trillion of bonds were issued, Bloomberg data show.
“The market is getting tired of low yields, but there still is no reason for them to go much higher,” said Margie Patel, a money manager who helps oversee $351 billion at Wells Capital Management in Boston. “Global easing is still in play, economic fundamentals are moving at a glacial pace and corporate balance sheets are pretty strong.”
While it’s hardly the first time the bull market in bonds has been declared over during the past few years, a spike in government-debt yields during the past two weeks is rekindling concern that the cycle is turning.
Warning Signs
With the yield on 30-year Treasury bonds climbing to a five-month high of 2.99 percent this week, Fortress Investment Group LLC principal Michael Novogratz said Wednesday in a Bloomberg Television interview that the “bear market has started.”
Some signs of strains have emerged in the corporate market. Investors withdrew $2.74 billion from U.S. junk-bond funds in the past week, the largest outflows this year, according to Lipper. BlackRock Inc.’s iShares iBoxx High Yield Corporate Bond ETF, the largest junk-bond exchange-traded fund, has lost more than $2.7 billion of market value the past three weeks to $15 billion.
Investors also have turned to credit derivatives to hedge against losses, with the cost to protect against defaults in the Markit CDX North American Investment Grade Index climbing to the highest since March 13.
“The fact that we got a vicious move in Treasuries has created stress in the market,” Lawrence McDonald, head of U.S. macro strategy at Societe Generale SA, said in a telephone interview. “It just creates a feeling in the market where people will shoot first and ask questions later.”
Fresh Interest
For all the concern, average yields on U.S. corporate bonds sold by both the most-creditworthy and the riskiest borrowers are still within 0.5 percentage point of the record-low 3.35 percent reached in April 2013, according to Bank of America Merrill Lynch indexes. In Europe, where the European Central Bank embarked on a bond-buying program this year to boost the region’s economy, yields are 1.72 percent, the data show.
Higher yields will only bring fresh interest from investors looking for any edge they can find to generate returns, said David Leduc, the chief investment officer at Standish Mellon Asset Management Co., which manages $170 billion.