Bond Funds Gain Cash Like Stocks in Dot-Com Era: Credit MarketsJohn Glover and John Detrixhe
The amount of money flowing into bond funds is poised to exceed the cash that went into stock funds during the Internet bubble, stoking concern fixed-income markets are headed for a fall.
Investors poured $480.2 billion into mutual funds that focus on debt in the two years ending June, compared with the $496.9 billion received by equity funds from 1999 to 2000, according to data compiled by Bloomberg and the Washington-based Investment Company Institute.
Concern the global economic recovery is faltering, with the U.S. growing at a slower-than-forecast 2.4 percent pace in the second quarter, is prompting investors to pile into fixed-income securities of all types even with some yields at record lows. The new cash has helped fuel a rally and drove yields on investment-grade U.S. corporate debt down to a record 3.79 percent last week, while two-year U.S. Treasury yields fell to an all-time low of less than 0.5 percent.
The money flowing into bonds is “probably not repeatable on a consistent basis,” said Joel Levington, managing director of corporate credit in New York at Brookfield Investment Management Inc., which oversees $24 billion. “Eventually it won’t be sustainable. Whether that means five years from now or five weeks is a little difficult to tell,” he said.
Bank of America Merrill Lynch’s Global Broad Market Index, which tracks more than 19,100 bonds of all types with a market value of $37.6 trillion, has gained 1.31 percent this month, the best since July 2009. The index is on track for an annual return of 10.2 percent, which would be the best since the measure was created in 1997.
The 10 lowest-yielding U.S. corporate bond deals ever were sold in the past 14 months, according to Deutsche Bank AG, with International Business Machines Corp. issuing $1.5 billion of three-year notes on Aug. 2 with a record-low 1 percent coupon.
Elsewhere in credit markets, Norfolk Southern Corp. may sell $100 million of bonds due in 2105 in a reopening of an earlier offering of 100-year debt, according to a person familiar with the transaction.
The bonds may be sold as soon as today, said the person, who declined to be identified because terms aren’t set. The railroad sold $300 million of 6 percent debt due 2105 in March 2005 in the last sale of 100-year bonds, Bloomberg data show.
The cost of protecting corporate bonds from default in the U.S. fell, with the Markit CDX North America Investment Grade Index Series 14, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, declining
0.24 basis point to a mid-price of 108.76 basis points as of 12:09 p.m. in New York, according to Markit Group Ltd. In London, the Markit iTraxx Europe Index of credit-default swaps linked to 125 companies with investment-grade ratings, declined
0.636 to 112.675, Markit prices show.
The indexes typically drop as investor confidence improves and rise as it deteriorates. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
The extra yield investors demand to hold global corporate bonds instead of government securities shrank 1 basis point last week to 176 basis points, or 1.76 percentage points, according to Bank of America Merrill Lynch’s Global Broad Market Corporate index. Spreads have narrowed 25 basis points since this year’s peak on June 11. Yields fell to 3.51 percent on Aug. 20, from
3.59 percent the week before, the data show.
Corporate bonds from the U.S. to Europe and Asia have returned 8.36 percent in 2010, following last year’s 16.3 percent rally, Bank of America Merrill Lynch index data show. Before last year, returns never exceeded 8.86 percent. Bonds have returned 1,050 basis points more than the MSCI World Index of stocks.
‘Some Kind of Yield’
“No one seems to want very risky assets but they still want some kind of yield,” said Toby Nangle, who helps oversee about $43 billion as a director of asset allocation at Baring Asset Management in London. “People generally view corporate debt as not a terribly scary place to be.”
Global stocks, which lost 9.45 percent during May’s European sovereign debt crisis when corporate bonds gave up 0.4 percent, have lost investors 2.4 percent this month, including re-invested dividends, according to the MSCI World Index.
Company debt has handed investors a 1.72 percent return in August, taking the total this year to 8.36 percent, according to Bank of America Merrill Lynch index data. Since the market’s trough in March 2009, the securities have returned 27.6 percent.
Global government bonds have gained 6 percent this year, including 1.55 percent this month. Treasury two-year yields fell to 0.45 percent on Aug. 20 and were at 0.48 percent today. Ten-and 30-year yields on German bunds also declined to their lowest ever last week.
Corporate debt offers a pick-up in yield over other relatively safe investments even after the rally. Federated Investors Inc.’s money-market funds have a 0.25 percent yield, while JPMorgan’s money-market funds have a 0.21 percent yield, according to data compiled by Bloomberg.
Investors took $9.1 billion out of equity funds in the week to Aug. 19, the most since July, according to Oleg Melentyev, a credit strategist at Bank of America Merrill Lynch Global Research in New York. Stock funds have had $215.4 billion of outflows the two years ended June, ICI data show.
“Bonds have done so well year-to-date and inflows been so strong” that “at some point you would imagine this one-way move would exhaust itself,” said Melentyev. “There are not so many great alternatives out there, in terms of where do you put your money to work. Equities are still a big question mark,” he said.
Concern the global economy is headed for another recession is fueling the fixed-income rally.
Claims for U.S. jobless benefits jumped to the highest level since November in the week ending Aug. 14, while manufacturing in the Philadelphia area shrank this month for the first time in a year, Labor Department and Federal Reserve reports showed Aug. 19. Home sales in the U.S. probably plunged, and orders for long-lasting goods climbed for the first time in three months in July, economists said before reports this week.
“There’s a sense of concern about safety, a sense of concern about economic growth, a sense of concern about security,” said Paul Owens, who helps manage the equivalent of about $1.8 billion as a credit analyst at Liontrust Investment Services Ltd. in London. “And if you think your laid-off neighbor may never get another job, that really changes your view of risk.”
The dot-com collapse of 2002 saw a reversal of the stock market’s fortunes after years of gains as investors re-assessed the risk of the new breed of technology companies.
The Nasdaq Composite Index, the home for many start-up Internet-company stocks, lost 74 percent of its value from a
5132.52 peak on March 10, 2000 to the end of 2002. The index hasn’t recovered, ending at 2179.76 last week.
The crash wiped about $6 trillion off stocks as investors concluded that prices weren’t supported by profits at companies such as Broadcom Corp. and Amazon.com Inc. The effects spilled into the broader economy, driving the U.S. into recession.
The same may be happening now with fixed-income, according to Tobias Levkovich, Citigroup Inc.’s chief U.S. equity strategist. The “extremities of the money flows” into fixed income from equities is troubling, Levkovich said in an Aug. 20 radio interview with Tom Keene on “Bloomberg Surveillance.”
“In 2000 or late 1999, we saw massive amounts of money going into the equity market at just the wrong time,” he said, while still predicting the S&P 500 Index will rise 9.6 percent from now to end the year at 1,175. “I feel the same way when I look at all the money going into bonds.”
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