A Six-Lane Freeway of $100 Bills Is Tormenting Credit Investors

Photographer: Andrew Harrer/Bloomberg

Think about all the ways the surging global debt market could implode, then argue yourself out of believing that any of those gloomy scenarios will come to pass.

Then do that mental exercise again. And again.

This is the agony of being a bond investor in 2015.

Serious dangers seem to be percolating after the world’s central banks printed the equivalent of $5.7 trillion to stimulate markets. That’s enough to pave a six-lane freeway circling the globe twice with $100 bills, according to UBS Group AG’s Mark Haefele.

Yet if you’ve tried to bet against the tidal wave of cash, you’ve likely gotten crushed. And it’s hard to see right now what could destabilize the efforts of some very determined central bankers.

“Over the past few years it could be said that the greatest challenge for investors was staying the course, and betting that central banks were determined to make ‘the fix’ work,” Haefele, UBS Wealth Management’s global chief investment officer, wrote in a May investment letter. “Again this year, the general idea that investors should follow the lead of central banks has worked.”

Obvious Risks

In 2015, staying the course has meant a 4.8 percent return for speculative-grade corporate bonds worldwide, after a 16.4 percent annualized return over the previous six years, according to Bank of America Merrill Lynch index data. Emerging-markets debt sold in the U.S. has returned 4.1 percent this year, following a 10.3 percent annualized gain since 2008.

There are some obvious risks looming over the market. Take Greece and the never-ending saga of whether it’ll default on its debt and exit the euro zone’s shared currency. Think of the potential fallout in Europe’s already fragile economy and how that could infect markets of surrounding nations.

Yet bond buyers are ambivalent about whether this drama poses any risks outside Greece. While 50 percent of European credit investors surveyed by Bank of America Corp. think markets are overly complacent about the potential for contagion from a Greek default, the other half believes the risk is adequately priced in, analysts Barnaby Martin, Ioannis Angelakis and Souheir Asba wrote in a May 27 report.

Then there’s China. Stock-market values are swinging by the most since 2010 there as government officials seek to tamp down increasing leverage and other market excesses while still supporting the country’s growth.

Dragging Feet

In the U.S., Federal Reserve members are talking about raising interest rates this year for the first time since 2006, which could ostensibly send bond investors into a tizzy akin to the so-called taper tantrum of 2013.

Loomis Sayles & Co. Vice Chairman Daniel Fuss downplayed this scenario in an interview this week, saying he expects the Fed to hold off on making a move until 2016 even in the face of an improving economy.

“They’re going to drag their feet absolutely as long as possible,” he said.

So for bond buyers, while it seems like the gravy train of central-bank policies must eventually meet a painful end, it’s hard to see exactly how. Yes, a Greece or China could throw the markets into turmoil. But investors have grown accustomed to policy makers who are always ready to prop up the financial system when needed. That six-lane freeway of cash is an awful powerful thing.