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February 15, 2012 8:31 pm
Yields on investment-grade US corporate bonds have hit a record low as investors buy into high-quality companies that offer higher rates than those offered by US Treasuries.
High-grade US debt has benefited from US Treasury yields hovering near historic lows following Federal Reserve purchases of long-dated government bonds and a pledge to keep US interest rates near zero until the end of 2014. But risk premiums, or spreads, on corporate debt have also narrowed this year as investors play down lingering risks from the eurozone debt crisis and focus on data showing improvements in the US economy.
According to a Barclays index that dates back to 1973, the average yield on US investment grade corporate debt fell to a record low of just 3.34 per cent on Tuesday, the most recent data available. The yield on an index of bonds issued only by industrial companies fell to a new low at 3.04 per cent. Spreads have also narrowed, but are not at historically tight levels, the index showed.
New issuance of investment-grade corporate debt has been lower at the start of this year versus last while the volume of securitised debt remains low.“There is a lack of high-quality product,” said Michael Hyman, a portfolio manager at ING Investment Management.
These low yields are a boon for companies. As yields have fallen in recent weeks, blue-chips and household names such as IBM, Procter & Gamble, Walt Disney and McDonald’s have been able to borrow billions of dollars at record low cost. On February 9, Disney sold five-year bonds paying interest at 1.125 per cent, the lowest coupon rate for five-year US unsecured corporate debt, according to Dealogic, which has been tracking this data since 1995.
Since the financial crisis, US investment grade companies have consistently set lows for yields as benchmark rates plunged and investors favoured fixed-income assets to equities, which suffered sharp losses in 2008.
Investors have maintained their confidence in highly-rated corporate bonds because these issuers have improved their balance sheets and stockpiled cash since the crisis.
“Investors continue searching for incremental yield,” said Jim Glascott, head of global debt capital markets at Barclays Capital. “Companies are in great shape.”
However, the low yields highlight the difficulty investors face in trying to generate positive returns in the current environment. With annual US inflation at close to 3 per cent, high-quality corporate bonds were not offering investors much return in absolute terms, said Jason Brady, a portfolio manager at Thornburg Investment Management.
“There is a clear case to be made that the [Fed] is engineering Treasury rates lower and that this is pushing investors into riskier assets,” Mr Brady said. “Yield is your cushion against loss. If there is not a lot of yield, that cushion is low.”
Average yields on financial company debt are not at record lows but have fallen from 4.56 per cent at the end of 2011 to 3.79 per cent as concerns about contagion from problems in the eurozone have eased following the extension of European Central Bank loans to the region’s banks.
Lingering uncertainty means that investors are still demanding significantly more yield on the bonds of financial versus industrial companies.
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