Notice to Bond Buyers: We’re All Out of High-Grade Notes

Investors are piling into junk debt this year partly because they can’t find enough higher-quality bonds for sale.

Even with issuance of investment-grade corporate bonds topping $703 billion in the U.S. this year, a record pace, it’s a fight to obtain a plain-vanilla company bond. The market is about as one-way as ever and buyers are accepting yields that are hovering around the lowest level since 2007 relative to benchmark Treasuries.

All of this is making the market less active, with average daily trading volumes falling 4 percent in the past two months, when compared with the same period last year.

In high yield, though, there’s not as much of a consensus about whether these securities are good buys. Blackstone Group LP’s Bennett Goodman said last month he was “rooting for a correction” in the market.

Some investors are willing to part with their speculative-grade holdings, so it’s easier to find such debt for sale. Daily trading in high-yield bonds has risen 23 percent to an average $7.2 billion since the end of April compared with the same period in 2013, according to Financial Industry Regulatory Authority data.

“We believe the appetite for junk is less a reflection of complacency (although there is surely some of that) as proof of a lack of quality bonds,” Christopher Low, chief economist at FTN Financial, wrote in a July 8 note to clients.

Fed Stimulus

At a time when the Federal Reserve holds about a fifth of outstanding Treasuries, and insurance companies to sovereign-wealth funds are hoarding investment-grade notes, it’s getting harder to find top-tier debt to buy. Regulations demanding brokers use such creditworthy notes as collateral when trading in derivatives and repurchase markets aren’t helping either.

Mutual-fund investors are also piling in, funneling $47.4 billion into investment-grade company debt this year, according to a July 10 report by Wells Fargo & Co. strategists. That compares with total high-yield bond fund deposits of $6.6 billion.

As some buyers get pushed out of high-grade and into junk, those yields are plunging. Yields on U.S. junk notes sank to an all-time low of 5.7 percent on June 23 from 7.1 percent a year earlier, Bank of America Merrill Lynch index data show. They’re currently at 5.8 percent.

After all, speculative-grade notes seem safe enough when the Fed is holding interest rates near zero for a sixth year, seeking to galvanize growth that’s been painfully slow since the 2008 financial crisis.

Investors are buying whatever they can find, betting that it’s better to be in a broad U.S. debt market that’s returned 30 percent since the end of 2008 than to stay out -- even if they’re getting paid less and less to take on more risk.

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