BofA Cuts Outlook for High-Grade Bonds Losing Most Since March

Bank of America Corp. cut its outlook for returns on investment-grade bonds in the U.S. this year as the debt loses the most since March.

“We now consider it most likely that total returns will fall short of our low 1.6 percent target,” wrote New York-based credit strategist Hans Mikkelsen in a Jan. 28 report. “The risk of the rotation out of bonds, into equities starting in 2013, has increased enough to become our base case.”

Investment-grade bonds are losing 0.6 percent in January after gaining 55.6 percent in the four years after 2008 as the Federal Reserve’s policy of holding benchmark interest rates at record lows pushes investors into riskier assets. The notes have declined 0.7 percent since October, even as speculative-grade bonds gain 4.4 percent and the Standard & Poor’s 500 Index has returned 6.9 percent with dividends reinvested.

“A disorderly rotation out of bonds, into equities -- where interest rates increase significantly, leading to massive outflows from high grade bond funds and much wider credit spreads -- is the biggest risk to investment grade this year and the one we are getting increasingly concerned about,” Mikkelsen wrote.