Relative yields on corporate debt, already near the lowest in more than a year, still have room to tighten, according to Jack Malvey, chief global markets strategist at Bank of New York Mellon Corp.
“There is more room to go,” Malvey said during an interview on Bloomberg TV’s “Lunch Money” with Stephanie Ruhle and Adam Johnson. “Investors are voting for the incremental yield and also for the portfolio diversification” that corporate bonds offer. The extra interest offered by “high-quality, high-yield” bonds makes them preferable on a total portfolio basis to investment-grade debt, he said.
The average yield of junk bonds was 7.07 percent on Oct. 5, up from a record low 6.95 percent on Sept. 19 and compared with an average 2.87 percent yield for investment-grade debt, according to Bank of America Merrill Lynch index data. Speculative-grade bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s.
“Over the near term, there’s no chance central banks will reverse their operations,” said Malvey, who formerly headed global fixed-income strategy at Lehman Brothers Holdings Inc., according to the Bank of New York Mellon website. “It’s pedal to the metal for monetary policy.”
The extra yield investors demand to hold company bonds from the most creditworthy to the riskiest borrowers rather than U.S. Treasuries stood at 240 basis points on Oct. 5, tying the lowest since 238 basis points on June 1, 2011, the index data show. A basis point is 0.01 percentage point.