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Bond Bulls Have Summer on Their Side as June Jinx Fades

Dune Beach Southhampton
Who’s going to bother putting sell orders in from the beach when central bankers are signaling they’ll keep propping up markets? Photographer: Jemal Countess/WireImage

Bond buyers seem awfully concerned nowadays about earning too little from their investments. They appear to be less bothered about traditional notions of safety and danger.

While the world’s biggest economies slow, investors are plowing cash into riskier securities at an accelerating rate, pushing the yield gap between junk-rated corporate bonds and more-creditworthy debt to the smallest since 2007. They also have been showing preference for debt of the most-fragile European nations -- countries like Greece and Spain -- relative to notes of Germany, the region’s economic engine.

This dynamic may not go away any time soon. While the month of June hasn’t been so kind in recent years, Bank of America Corp. strategists say the chances of a selloff once the U.S. summer arrives are getting slimmer. Trading is slowing as Wall Street types become more focused on planning golf outings and getaways to the Hamptons and less on the market. Who’s going to bother putting sell orders in from the beach when central bankers are signaling they’ll keep propping up markets?

“The likelihood of a significant correction has been steadily diminishing,” they wrote in a report last week under a section titled “Breaking the June Jinx.” “As we head into the summer, the path of least resistance appears to be a grind up in risk assets,” meaning lower-rated debt will keep performing well, the analysts said.

Global Compression

Junk bonds in the U.S. have already delivered 5.2 percent returns in 2014, more than higher-rated notes. Average yields plunged to 5.78 percent this week, the lowest ever, Bank of America Merrill Lynch index data show.

Yields on speculative-grade bonds are now 2.72 percentage points more than those paid on high-grade notes, the smallest premium for the additional risk in almost seven years.

This compression between rates on riskier and safer debt can be seen around the world. Take debt of Greece, a nation with a 27 percent jobless rate, and compare it against notes of Germany, a country with an unemployment rate of 6.7 percent.

Greek bonds yielded an average 5.82 percent on June 10, the least since 2010, Bank of America Merrill Lynch data show. That’s 4.96 percentage points more than yields on Germany’s debt, the smallest premium since 2010.

Pass the Sunscreen

So why are investors so complacent? Well, why wouldn’t they be? It’s proven again and again to be a losing trade to wager against central banks globally, which are set on lowering yields even further, if possible, through monetary stimulus to ignite growth.

While the U.S. Federal Reserve is slowing its monthly bond purchases, the European Central Bank is accelerating its efforts, which has helped lower costs for the neediest borrowers, including Greece.

There is, of course, a nagging concern that the stimulus efforts haven’t proven effective enough and may be running out of power to further spur growth. This week the World Bank cut its global forecast to 2.8 percent this year, from a January prediction of 3.2 percent, amid weaker outlooks for the U.S., Russia and China.

But that feels like something traders will worry about in the fall. In the meantime, pass the Coppertone 15.

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