Death of Credit Rally Exaggerated to Barclays’s Forecasts

After five years of rallying 11 percent on average, corporate bonds seemed ready for a breather in 2014. Not so fast.

The debt is trouncing stocks and has returned 3.9 percent in the first four months of the year, Bank of America Merrill Lynch index data show. Barclays Plc strategists led by Jeffrey Meli and Bradley Rogoff say there’s even more room to go, and are now increasing their returns predictions.

Why? U.S. growth is slow and steady -- perfect for corporate debt. And economists are lowering their forecasts for how much benchmark borrowing costs may rise this year, allaying concern that a sudden rise in U.S. Treasury yields will erode bond values.

There’s another reason, as well, particularly for investment-grade credit. Investors are reluctant to let go of bonds they already own, even if they’re losing value, since they don’t know whether they’ll be able to buy them back, the Barclays strategists said in today’s report.

Traders trying to purchase investment-grade notes were failing about 46 percent of the time at the end of last year, 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.

Credit Frenzy

This is “dampening the response of credit” to negative news, the Barclays analysts said. They raised their forecast for junk-bond returns by 2.5 percentage points to as much as 6.5 percent, and lifted their prediction for high-grade debt by 0.25 percentage point to up to 2 percentage points more than government debt.

“We do not see a 2014 catalyst for a sell-off, suggesting that a significant credit market downturn remains farther into the future,” they wrote.

So the frenzy for corporate bonds will continue because there’s, well, a frenzy for corporate bonds. After all, with the Standard & Poor’s 500 Index returning 1.7 percent after a choppy start to the year and an escalating conflict in Ukraine, what else are investors going to buy?

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