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Investment-Grade Yields in U.S. Plunge to Lowest Since 1986

U.S. investment-grade bond yields plunged to the lowest in more than two decades yesterday as the Federal Reserve pledges to hold interest rates near zero through at least late 2014 and investors seek higher returns.

The yield on Bank of America Merrill Lynch’s U.S. Corporate Master index fell to 3.44 percent yesterday, passing the previous low of 3.45 percent reached in August. That’s the least in the bank’s data going back to October 1986. While yields are at a record low, relative spreads above Treasuries are at 208 basis points, the least since August, suggesting that investors may wager spreads will narrow further.

The Fed’s low interest-rate policy is encouraging buyers to take extra credit risk as they seek higher returns, increasing demand for such securities. Borrowers from Burbank, California-based Walt Disney Co. to International Business Machines Corp. are taking advantage of borrowing costs at all-time lows. As investors seek a haven from Europe’s sovereign-debt turmoil, that is driving down Treasury yields, while investors are buying higher-grade corporate bonds for the potential extra returns.

“Over the past couple of weeks, we have seen that record-low yields have not discouraged the buying interest,” U.S. credit research analysts at JPMorgan Chase & Co. led by Arun Kumar wrote in a report today. “Almost all investors we speak with report that they continue to see inflows into their funds even with yields at these levels. This includes investors from overseas as well.”

Yields Tumble

Yields on investment-grade debt have tumbled from 4 percent a year ago and 4.55 percent in February 2010, according to Bank of America Merrill Lynch index data. That’s down from as high as 9.3 percent in October 2008 as credit markets froze in the aftermath of the collapse of Lehman Brothers Holdings Inc. U.S. investment grade corporate bonds have returned 3 percent in the first two months this year, the data show.

Investment-grade borrowers have issued $195.3 billion of U.S. dollar-denominated debt in 2012, surpassing the $188.3 billion offered in the similar period last year, according to data compiled by Bloomberg. Last year’s issuance was $883.5 billion.

Disney, the biggest U.S. entertainment company, sold $1.4 billion of debt this month, including $1 billion of 1.125 percent five-year notes, a record low for the company for that maturity, Bloomberg data show.

IBM, the world’s biggest computer services company based in Armonk, New York, obtained a record-low coupon on three-year notes when it sold $1.5 billion of 0.55 percent notes due in February 2015 this month, the data show.

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