Yields Fall to Record Low as Bonds Beat Stocks
Investment-grade corporate bond yields in the U.S. fell to a record low as the economy grows enough to allow borrowers to meet debt payments while failing to spark faster inflation that would boost equities.
Yields declined to 3.392 percent yesterday, below the previous record of 3.404 percent set on March 2, according to the Bank of America Merrill Lynch U.S. Corporate Master index. Company bonds globally have gained 0.38 percent this month, beating stocks for the first time since December as the MSCI All-Country World Index (MXWD) lost 2.4 percent.
While the International Monetary Fund is raising its global growth forecast, boosted by the outlook for the U.S., it said recent improvements remain “very fragile.” Morgan Stanley estimates that the global inflation rate will slow to 3.5 percent in 2012 from 4.4 percent in 2011.
“After the experience of 2008, investors’ appetite to own equities, an asset class with inherently high volatility, has been reduced,” Ed Marrinan, a macro credit strategist at Royal Bank of Scotland Group Plc in Stamford, Connecticut, said in a telephone interview. “Instead, many investors are expressing a preference to own assets with lower risk profile and more reliable returns like corporate bonds. Since late March, equities have taken a knock because of a return of European anxiety.”
Stocks worldwide soared 12 percent in the first quarter including reinvested dividends, versus a 3.8 percent gain for bonds globally. Yields on the Bank of America Merrill Lynch index, which includes bonds from the most creditworthy to the riskiest, have declined to 4.17 percent from this year’s high of 4.82 percent on Jan. 3.
“Spain is coming back to the spotlight and some investors are sensitive to the situation,” said Jody Lurie, a corporate- credit analyst at Janney Montgomery Scott LLC in Philadelphia. “The equity market is more affected by these headwinds.”
Elsewhere in credit markets, a benchmark gauge of U.S. company credit risk fell for the first time in three days, with the Markit CDX North America Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, declining 1.5 basis points to a mid-price of 98.6 basis points as of 11:49 a.m. in New York, according to prices compiled by Bloomberg.
The index typically falls as investor confidence improves and rises as it deteriorates. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Citigroup Most Active
The U.S. two-year interest-rate swap spread, a measure of bond market stress, declined 0.5 basis point to 29.75 basis points as of 11:47 a.m. in New York. The gauge narrows when investors favor assets such as corporate bonds widens when they seek the perceived safety of government securities.
Bonds of Citigroup Inc. are the most actively traded U.S. corporate securities by dealers today, with 47 trades of $1 million or more as of 11:49 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Returns on corporate bonds this month compare with a gain of 0.015 percent in March, according to the Bank of America Merrill Lynch Global Broad Market Corporate & High Yield Index. Stocks gained 0.71 percent in March, according to the MSCI index, which includes both emerging and developed-world markets.
Corporate debt is “fairly valued” even as the Fed is poised to hold down interest rates for too long, stoking higher inflation and hurting savers, Martin Fridson, global credit strategist at BNP Paribas Investment Partners, said yesterday.
“They’re going to have difficulty implementing the exit plan that they’ve outlined,” partly because lawmakers would oppose monetary tightening with the U.S. still facing high levels of unemployment, Fridson said yesterday in a radio interview on “Bloomberg Surveillance” with Tom Keene. “I think we’re coming to a crunch at some point.”
The world economy is set to expand 3.5 percent this year, the Washington-based IMF said April 17 in its World Economic Outlook, boosting its forecast from 3.3 percent in January.
The U.S. will grow 2.1 percent this year and 2.4 percent in 2013, the IMF said. The euro area economy is projected to decline by 0.3 percent in 2012, an improvement from the 0.5 percent previously forecasted.
“The global recovery is strong enough to support credit quality but there’s enough uncertainty out there to prevent companies from re-levering their balance sheets,” Jeffrey Meli, the head of credit strategy at Barclays Plc in New York, said in a telephone interview.
Signs the economy is gaining traction had led investors to riskier assets such as stocks in the first quarter. Santa Clara, California-based Intel Corp., the world’s largest semiconductor maker, and International Business Machines Corp., the biggest computer-services provider, posted the slowest sales growth in more than two years this week.
IBM’s revenue climbed 0.3 percent to $24.7 billion last quarter, while Intel sales rose 0.5 percent to $12.9 billion. That was the smallest increase for either company since the third quarter of 2009.
“Stock markets are focused on growth,” RBS’s Marrinan said. “When economies are in recession, companies’ earnings are inevitably impacted by market conditions in which they operate. Bond investors, in contrast, are less focused on a company’s scope to grow profit than on their ability to service its debt.”
Europe’s sovereign-debt crisis also is weighing on investors, with Italian and Spanish bonds leading declines yesterday among the region’s higher-yielding government securities. Spain’s unemployment rate ended last year at 22.9 percent, compared with 8.3 percent in 2007.
“When risk flares up, people roll down the risk spectrum,” Meli said. “A repercussion of the credit crisis is that there is a preference for fixed income because of the greater volatility in equity.”
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