Safest Part of Bond Market Founders as Riskiest Flourishes

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Bonds that are typically used as a haven are tumbling while high-yield debt rallies.

Developed-market sovereign bonds around the world have fallen 0.4 percent in the past three months, with benchmark Treasuries sliding 0.5 percent, based on Bloomberg World Bond Indexes. High-yield securities returned 2.3 percent.

So-called junk bonds have become a haven for now as investors seek higher yields than they get from sovereign debt. Government securities are plunging after central banks that are trying to spur their economies with lower borrowing costs pushed yields down so far that investors went on strike. German bunds have slumped for four straight weeks.

“The economic recovery is on track, which is pushing U.S. and German yields higher,” said Will Tseng, a portfolio manager in Taipei at Mirae Asset Global Investments Co. which manages $70 billion. “As long as investors expect the economy to grow, risky assets, especially junk bonds, will perform well.”

The benchmark Treasury 10-year yield was little changed at 2.23 percent at 6:41 a.m. in London, according to Bloomberg Bond Trader data. It has climbed from this year’s low of 1.64 percent set in January. The price of the 2.125 percent note maturing in May 2025 was 99 3/32.

Ten-year German yields have jumped to 0.65 percent from the record-low 0.049 percent on April 17.

Tseng said he owns more high-yield emerging-market dollar-denominated bonds than the proportion in the index he uses to gauge performance.

‘Crowded’ Trade

The extra yield investors are willing to accept to buy high-yield corporate bonds instead of Treasuries has narrowed to 4.52 percentage points from as much as 5.74 percentage points in December, based on the Bloomberg indexes. It shrank to 4.519 on May 11, the least since November.

The danger is that the rush for junk bonds is becoming a “crowded” trade, said Hajime Nagata, a fund manager at Tokyo-based Diam Co., which oversees the equivalent of $145 billion. Nagata said he holds fewer of the securities than the proportion in the benchmark he follows.

Junk bonds are high-risk, high-yield securities rated below Baa3 by Moody’s Investors Service and less than BBB- by Standard & Poor’s.

While they usually attract only the biggest risk takers, for the moment, they’re a harbor in the bond-market storm.

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