Bond Returns Post Global Records as Warnings Go Unheeded
Bonds from the Americas to Asia and Europe are generating their best returns through the first four months of a year on record, as slower-than-forecast growth and declining inflation vindicate the bulls.
Returns of 0.54 percent in April on debt ranging from corporate and government bonds to mortgage-backed securities bring gains for the year to 2.7 percent, according to the Bank of America Merrill Lynch Global Broad Market Index. That has more than erased the losses of 0.31 percent investors were handed in 2013 after the Federal Reserve started preparing to withdraw five years of unprecedented stimulus measures.
A slowdown last quarter in the world’s biggest economy and slower inflation globally boosted demand for fixed-income assets, counteracting concerns that investors have become too complacent and borrowers overextended after debt surged to $100 trillion globally from $70 trillion in 2007. Apollo Global Management LLC co-founder Marc Rowan said this week he’s seeing “danger signs” of a future crisis while former New York Fed President E. Gerald Corrigan warned of a “disorderly adjustment” from the central bank’s pullback.
“There are clearly threats that are welling up at present,” Edward Marrinan, a credit strategist at RBS Securities, said in a telephone interview from Stamford, Connecticut. “But their manifestation into valuations, we don’t think, is likely until later in the cycle.”
Yields on bonds globally reached 1.86 percent on April 30, up 35 basis points from record-lows in May and compared with a 3.16 percent average over the past decade, Bank of America Merrill Lynch index data show. The extra yield investors demand to own those bonds rather than government debentures narrowed to 43 basis points from 50 basis points at the end of last year.
The Fed is withdrawing in “measured steps” as a government report yesterday showed the economy slowed more than economists forecast in the first quarter, when harsh weather chilled investment and exports dropped. The 0.1 percent annual pace of expansion in gross domestic product followed a 2.6 percent gain in the fourth quarter.
Global inflation was just 2 percent in February, the lowest since late 2009, when the world was struggling with recession, according to a tally by economists at JPMorgan Chase & Co.
Corporates have led gains in all debt classes, rising 3.7 percent this year, compared with 2.7 percent for sovereign debt, Bank of America Merrill Lynch index data show.
Spanish government bonds led returns among the 50 biggest issuers in the broad-market index, with average gains of 7.4 percent, followed by 6.7 percent for Italian debt and 5.8 percent for Irish securities. Verizon Communications Inc. (VZ) led gains among corporate borrowers, with a 5.1 percent increase.
The Fed pared its target yesterday for monthly asset purchases that have buoyed debt markets, cutting them for the fourth straight month to $45 billion, the Federal Open Market Committee said in a statement after its meeting in Washington.
The stimulus has helped prompt $19.8 trillion of global corporate bond offerings since the end of 2008, including a record $374 billion of U.S. junk bond sales last year, according to data compiled by Bloomberg.
The Fed’s withdrawal could lead to a “disorderly adjustment in credit markets,” Corrigan, now co-chairman of Goldman Sachs Group Inc.’s risk-management committee, said in the text of a speech delivered on April 29 at the Montreal Council on Foreign Relations.
“Some observers -- including myself -- have been concerned that the wind-down of these extraordinary policies could prove to be both difficult and risky,” said Corrigan, who served as the New York Fed president until 1993 before joining Goldman Sachs. “I am confident the Fed is already highly sensitive to these risk factors.”
The Fed, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency have warned in recent months that underwriting standards for speculative-grade issuers are weakening as investors become more willing to accept looser terms.
The debt issued by U.S. speculative-grade companies has climbed to more than five times their earnings before interest, taxes, depreciation and amortization as measured by by Standard & Poor’s Capital IQ LCD. That’s up from 4.1 last April and the post-crisis low of 3.5 in February 2009.
“All the danger signs are there of a future crisis,” Rowan said April 29 at the Milken Institute Global Conference in Beverly Hills, California. “We’re back to doing exactly the same things that were done in the credit markets during the crisis. Our job is to step wisely and try to avoid that.”
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