Lost Amid Huge Actavis Bond Sale Is a Sign That Not All Is Right

Buyers are jockeying for a piece of the second-biggest U.S. corporate bond sale ever, painting a picture of insatiable demand for anything with a yield. Money flowing away from exchange-traded funds suggests something else.

Just as Actavis Plc marketed its $21 billion bond offering on Monday to help fund its acquisition of Botox-maker Allergan Inc., investors yanked $519 million from BlackRock Inc.’s iShares Core U.S. Aggregate Bond ETF.

It was the biggest daily redemption in the fund’s 11-year history, and brought outflows from U.S. ETFs focused on top-rated bonds to about $2 billion in the past week, according to data compiled by Bloomberg.

So while there’s a solid argument for buying U.S. bonds that are yielding about the most on record relative to similar debt in the Europe, some naysayers are going against the grain.

U.S. credit benefits from attractive relative value to European securities “as well as the general global re-allocation into U.S. fixed income,” Bank of America Corp. analyst Hans Mikkelsen wrote in a March 2 report. “If we were not concerned about the Fed, this would be a longer-term view.”

Investors are swarming to U.S. investment-grade bonds because they yield 2.1 percentage points more than similarly rated European notes, close to the biggest premium on record, Bank of America Merrill Lynch index data show. It’s not that U.S. yields are high -- at 3 percent, they’re low on a historical basis -- it’s just that European yields are even lower as policy makers there step up monetary stimulus.

Investor Dilemma

Yield-starved buyers put in orders for more than $90 billion of Actavis’s bonds, more than four times the offering size, letting the drug-maker shave about $10 million in annual interest costs from the biggest portion of the deal.

Here’s the dilemma for investors: Should they give in to the global dynamic of ever-lower (and even negative) rates and embrace U.S. bonds that at least yield something? Or do they hoard cash and prepare for a time when the Fed will send borrowing costs higher as growth picks up?

Some traders are getting out now, after the best January returns for U.S. bonds since 1988. The debt kicked off the year with 2.2 percent gains in January, then lost 1 percent in February and fell another 0.4 percent Monday to start off March, according to Bank of America Merrill Lynch index data.

The losses have been fueled by a rise in benchmark Treasury yields, a sign that investors see the U.S. economy strengthening.

The stakes are high for U.S. investment-grade bondholders as the Fed debates raising interest rates within a few months. The debt is about the most vulnerable ever to losses tied to rising benchmark yields, according to a measure called effective duration.

Many just keep on buying, but some are opting out.

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