BofA Sees Big U.S. Corporate-Bond Rally Despite Investor Worry

  • `Market is wide open' for investment grade, strategist says
  • Bank forecasts borrowing costs to cheapen as volatility drops

U.S. investment-grade bonds may fall to the cheapest levels in more than seven months this year and fixed-income investors are overly pessimistic about the balance sheets of corporate America, according to Bank of America Corp.

The extra yield that investors demand to hold U.S. investment-grade bonds over Treasuries, or spread, may drop to 150 basis points by the end of the year from 211 on Feb. 26, said Hans Mikkelsen, head of U.S. investment-grade credit research at Bank of America Merrill Lynch. The measure last touched that level in July.

While issuers stepped to the sidelines this year because of increased volatility, more positive sentiment since mid-February is helping spur sales and tighter yield premiums, Mikkelsen said in an interview.

“There is a general sense among our investors that corporate balance sheets are late cycle and that leverage ratios are sort of getting to the peaks we have seen historically,” Mikkelsen said. “I just take the opposite view of that.”

U.S. investment-grade corporate bond sales have expanded for the past five years, and are up 18 percent so far this year to $253 billion after Anheuser-Busch InBev NV sold a record $46 billion of bonds to finance its takeover of SABMiller Plc, according to data compiled by Bloomberg.

Volatility Jump

The Chicago Board Options Exchange Volatility Index jumped to 32.09 on Jan. 20, from 18.21 the end of 2015, as concerns about the global economy intensified amid a rout in stocks and commodities triggered by worries about the Chinese economy. The index closed at 17.7 on March 2, as oil prices stabilized and Chinese authorities work to calm investor fears of a slowdown.

Analysts at Citigroup Inc. led by Stephen Antczak have also expressed concern about the stop-start nature of the market, with about $570 billion of maturities to get refinanced by year-end and a pipeline of mergers and acquisitions that need refunding.

Even with mergers and acquisitions expected to slow, Bank of America expects deals that have already been announced will support market volumes this year, along with issuance by banks seeking to boost their balance sheets. Mikkelsen is forecasting $1.2 trillion of high-grade U.S. corporate bond sales this year, slightly less than last year’s $1.3 trillion.

“Right now the market is wide open,” Mikkelsen said. “There will be times again, obviously, where supply slows down. But I think that the kind of market conditions we had at the beginning of the year -- I would think they are unlikely to repeat.”

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