Treasuries' Allure Only Grows as Commodity Slump Hurts Junk Debt

  • U.S. high-yield premium to Treasuries is biggest since 2012
  • Pimco's Mark Kiesel says credit market is attractive

Bond bulls are piling into Treasuries as turmoil in junk bonds pushes investors into the safety of lower-yielding government debt.

Diminished demand for energy companies spurred losses in speculative-grade debt, pushing the yield on an index of U.S. high-yield corporate obligations above 8 percent. U.S. government securities rose Monday and junk bonds extended losses as Glencore Plc, the miner and commodity trader, plunged to a record and oil prices fell. The yield of 8.01 percent reached Sept. 25 on the junk-bond index was only surpassed once in the past four years, in August, based on Bloomberg World Bond Indexes.

Investors are seeking a haven after the Federal Reserve refrained from raising interest rates Sept. 17, citing international risks to the economy. Turmoil in Chinese markets stoked a global market rout amid concern that economic growth is slowing.

“The inflation and commodity price outlook has deteriorated mainly because of China,” said Philip Marey, a senior market economist at Rabobank Groep in Utrecht, the Netherlands. “That has weakened energy companies and reduced the market expectations about a Fed hike. Hence the demand for U.S. Treasuries.”

The benchmark U.S. 10-year note yield dropped six basis points, or 0.06 percentage point, to 2.1 percent as of about 1:30 p.m. New York time, according to Bloomberg Bond Trader data. The 2 percent security due in August 2025 rose 1/2, or $5 per $1,000 face amount, to 99 1/32.

U.S. high-yield bonds pay 654 basis points more than Treasuries, the most in three years, based on the Bloomberg indexes.

U.S. high-yield energy bonds have fallen 3 percent this month, based on Bank of America Corp. data. 

“I’m cautious on the credit market now,” said Hajime Nagata, who invests in bonds in Tokyo for Diam, which manages the equivalent of $144 billion. Energy and mining are suffering most, he said. “Investors are not willing to lend to these sectors.”

Diam is underweight corporate bonds and overweight Treasuries, he said. An underweight position means that a fund holds less of the securities than contained in the benchmark it uses to track performance.

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

At least one investor is bullish on high-yield debt. Pacific Investment Management Co., with $1.52 trillion in assets, said in a report last week that it has a healthy outlook for the obligations, excluding commodity-related securities.

“We view the credit market as attractive, given our outlook for supportive economic growth and low defaults,” Mark Kiesel, the chief investment officer for global credit at Pimco, wrote in the report Sept. 23. “Any credit spread widening or market volatility that occurs around anticipated Fed rate hikes should provide attractive entry points.”

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