U.S. Federal Reserve Chairman Ben S. Bernanke’s unprecedented stimulus to spur economic growth has decreased the difference between yields of corporate and government securities to the least since 2007.
The extra yield investors demand to hold corporate debt worldwide rather than sovereign obligations narrowed to 138 basis points May 3, the lowest level since November 2007, according to the Bank of America Merrill Lynch Global Corporate Index. Spreads have decreased by 373 basis points from the height of the worst financial crisis since the 1930s, falling from 511 basis points in March 2009.
Bernanke has held overnight interest rates between zero and 0.25 percent since December 2008, spurring positive returns in the global corporate bond market in each of the subsequent years. The Fed has pledged to hold the benchmark near zero as long as U.S. unemployment remains above 6.5 percent and the outlook for inflation doesn’t exceed 2.5 percent.
“Risk-free assets aren’t offering much in terms of absolute yields, so those investors are moving to credit,” Ashish Shah, the head of global credit investment at New York-based AllianceBernstein LP, which oversees $256 billion in fixed-income assets, said in a telephone interview. “There’s definitely room to tighten further.”
The yield differential was 99 basis points on Aug. 9, 2007, when BNP Paribas SA suspended withdrawals from three investment funds because it said it couldn’t “fairly” value its holdings, the start of a credit freeze that led to $2 trillion in writedowns and losses at the world’s largest banks. Spreads closed at a record low 37 basis points in 1997, Bank of America Merrill Lynch Index data show.