Goldman Says `Outsized' Company Bond Returns Thing of the Past on Economy

“Outsized” returns in corporate bonds are a thing of the past because an increase in government yields as the economy recovers will squeeze the debt’s performance, according to Goldman Sachs Group Inc.

Company bonds will return 1.2 percent over the coming year compared with 4.7 percent in the past three months, Goldman strategists led by Charles Himmelberg and Alberto Gallo in New York wrote in an Oct. 15 report. Money managers can still aim for double-digit returns by investing in bonds of high-yield issuers, banks and companies in Europe’s periphery, they wrote.

“The outsized returns available in corporate credit are firmly behind us,” wrote Himmelberg and Gallo. “Meaningful spread compression is nearly impossible to envision without a corresponding rise in the currently very low levels of government bond yields.”

Investment-grade corporate bonds have returned 9 percent this year, following gains of 16 percent in all of 2009, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. The debt is now more attractive relative to government bonds for excess rather than for total returns, Himmelberg and Gallo wrote.

To contact the reporter on this story: Bryan Keogh in London at bkeogh4@bloomberg.net

To contact the editors responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net

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