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August 3, 2011 7:00 pm
The yield on high-quality US corporate bonds has fallen to record lows as investors seek out debt from top-notch companies as a relatively safe destination for their cash.
The average yield on the benchmark Barclays Capital index of US corporate bonds with investment-grade ratings on Wednesday reached an all-time low of 3.42 per cent, five basis points below the previous record of reached in November of 2010.
“Growth is continuing to slow and that is a challenge for all risk assets,” says Ashish Shah, head of global credit at Alliance Bernstein. “Investment-grade corporate credit is acting as a safe haven, because these companies have record amounts of cash on their balance sheets and low levels of short-term debt.”
The rally in top-quality corporate debt comes as stocks and riskier bonds have continued to lose value. Stock markets around the world fell on Wednesday on fears of a US double-dip recession and continued uncertainty about the fate of eurozone sovereign debt.
The uncertainty regarding the outlook for sovereign credits has made corporate bonds prized by investors.
Colleen Denzler, head of fixed-income strategy at Janus Capital, said: “Companies have spent the last three years putting themselves in a position to withstand risk. They have strong balance sheets and lots of cash.”
The plunge in top-quality corporate bond yields reflects the sharp falls in US government bond yields. Even though yields on corporate debt are at new lows, the risk premium paid relative to government debt is above the lows for the year but has remained steady in recent weeks. On Wednesday, the spread on the Barclays Capital corporate bond index was at 153bp, unchanged from two weeks ago.
The low yields could prompt some companies to sell new debt to lock in record low interest rates. However, the amount of new supply could be slightly subdued as it is harder to sell bonds in volatile conditions.
The key factor for corporate bond sentiment will be whether US growth prospects decline even further. “It becomes a question of monitoring US growth,” says Brad Rogoff, head of US credit strategy at Barclays Capital. “Now that growth has fallen, you can’t feel quite as much conviction about credit as you may have had a few months ago.”
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