Prepare to Fail Buying Bonds in Sellers’ World: Credit MarketsLisa Abramowicz
Want to buy a corporate bond? Good luck finding one.
Traders trying to purchase investment-grade notes are failing about 46 percent of the time, close to the worst rate in more than four years as measured by activity on MarketAxess Holdings Inc.’s electronic platform. On the flip side, investors trying to sell the debt are having the easiest time on record, with an 85 percent success rate.
Bond buyers are showing an unwillingness to part with their holdings as a rally fueled by more than five years of unprecedented Federal Reserve stimulus refuses to die. Ironically, it’s harder than ever to find securities for sale even though the U.S. corporate-debt market has grown 53 percent since 2008, with companies selling $6.9 trillion of notes since then, according to data compiled by the Securities Industry and Financial Markets Association and Bloomberg.
“Right now, everyone’s a buyer,” said Edward Meigs, who manages $1.6 billion of debt assets at First Eagle Investment Management in Baltimore. “There’s a marked level of complacency.”
Traders will submit offers to buy or sell bonds on MarketAxess’s platform within a set period of time. The transaction is considered to fail when time runs out with no takers. New York-based MarketAxess is the most-active electronic venue for trading corporate bonds in the U.S.
Investors are dismissing concerns that a pullback in Fed stimulus will send yields higher and erode gains. Demand helped propel investment-grade securities to a 3 percent return in the first quarter, the best start to a year in a decade, and upending Wall Street predictions for below-average gains, according to Bank of America Merrill Lynch index data.
Buyers have sent risk premiums down to the lowest since July 2007, the month before the credit crisis began. The extra yield investors demand to own corporates instead of government debt has shrunk 0.17 percentage point this year to 1.7 percentage points.
“Pretty much every sale has been a bad sale,” Meigs said. “It’s a one-way market.”
The reinvigorated race for company bonds comes on the heels of a 10.8 percent average annual gain on the notes since 2008, Bank of America Merrill Lynch index data show. Whenever the debt has tumbled, it’s then come back, punishing sellers.
For example, the debt recovered from a 4.6 percent loss in May and June -- prompted by concern that the Fed would pare its bond purchases -- by gaining 5.6 percent in the next nine months.
While economists expect Treasuries to lose value this year as the Fed slows its securities buying, investors are still stampeding back to U.S. assets in the face of uncertainty in China and an escalating conflict between Ukraine and Russia.
Buyers have gobbled up about $415 billion of new corporate bonds in the first three months of the year, the third-biggest quarter ever, according to data compiled by Bloomberg. Petroleo Brasileiro SA and Cisco Systems Inc. have led this year’s sales, which follow a record $1.5 trillion in issuance last year, Bloomberg data show.
“People are very hungry for bonds, and so they really try to get bonds at new issue because there’s stuff for sale,” said Lon Erickson, a Santa Fe, New Mexico-based money manager at Thornburg Investment Management Inc., which oversees about $94 billion.
Economists’ surveyed by Bloomberg forecast that Treasury yields will rise to 3.38 percent by the end of the year, from 2.73 percent today. This will eat into returns on corporate bonds, as the debentures typically trade in tandem with government debt.
“You’ve got to take a step back and say, ‘What is the real value here?’” Erickson said. “It doesn’t make sense for some of these credits to be trading at these levels.”
Yields on high-yield, high-risk bonds in the U.S. have dropped to 6.1 percent, just 0.11 percentage point from the all-time low reached last May, according to Bank of America Merrill Lynch index data. High-yield, or junk, debt is rated below Baa3 by Moody’s Investors Service or lower than BBB- by Standard & Poor’s.
The gap between success rates on traders trying to sell bonds versus those attempting to buy them widened to the most since 2009 in the period ended Dec. 31, according to MarketAxess.
“It is very difficult to buy bonds,” said Scott Colyer, chief executive officer of Monument, Colorado-based Advisors Asset Management Inc., which oversees about $14.2 billion.