Investment-Grade Long Bonds Pose Most Risk, Morgan Stanley Says

Longer-dated bonds pose the “biggest risk” in the U.S. corporate bond market as record-low interest rates drive prices on the debt to all-time highs, according to Morgan Stanley.

Investment-grade, 30-year bonds may lose 25 cents on the dollar or more if rates return to levels before the financial crisis, analysts including Sivan Mahadevan wrote in a research note to clients dated today. The analysis is based on bond trading in December 2006, before the financial crisis began, at its height in October 2008 and today.

“The further out in maturity and up in quality you go, the higher the potential fall,” the New York-based analysts wrote.

Demand for corporate bonds has risen as the Federal Reserve has held interest rates at between zero and 0.25 percent for a fourth year to spur economic expansion.

That’s helped push yields on investment-grade bonds to 3.035 percent as of yesterday, close to the record low 2.978 percent reached Sept. 3, Bank of America Merrill Lynch index data show. The par-weighted price of the bonds reached 113.965 cents on the dollar as of July 24, before declining to 113.059 cents.

To contact the reporter on this story: Matt Robinson in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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