Ditch Treasuries for Corporate Debt, $470 Billion Manager Saysby
Yield pickup makes company bonds attractive, Columbia says
Money manager expects tightening spread to offset rising rates
Leave the Treasuries; take the corporates.
That’s what global asset manager Columbia Threadneedle Investments is telling its clients, pointing to wide spreads between yields on U.S. government bonds and their investment-grade corporate peers. The gap reached the widest since 2012 in February, based on a Bank of America Merrill Lynch index that tracks highly-rated company debt.
U.S. yields remain crimped as a cautious Federal Reserve and signs of global economic weakness drive investors into government bonds. Even as Treasuries offer a considerable advantage over negative-yielding sovereigns in Asia and Europe, the coupons are substantially lower than what U.S. corporate bonds provide for an acceptable amount of additional risk, Columbia says.
“Investment-grade corporate bonds provide historically wide spreads or yield cushion, which more than compensate investors for credit risk,” Colin Lundgren, the head of fixed income in Minneapolis at Columbia, which managed about $470 billion in assets as of Dec. 31, wrote this week.
The yield on the benchmark 10-year note rose three basis points, or 0.03 percentage point, to 1.75 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in February 2026 was 98 26/32.
Lundgren said he expects Treasury yields to rise more than corporates as the Fed looks to lift interest rates, shrinking the difference between the two.
“Higher rates and tighter spreads should offset each other -- not exactly, but approximately,” he wrote in an e-mail. “That should result in a price return close to zero, which implies the total return for IG corporate investors is the coupon, not much more or less. Given recent market returns, coupon-like returns sound relatively attractive to me.”
A third of the sovereign debt in the Bloomberg Global Developed Sovereign Bond Index has negative yields. The relative yield pickup on U.S. debt has drawn demand to the Treasuries market, said Arnold Espe, a portfolio manager at USAA Investments in San Antonio.
“We’re the only good house in a bad neighborhood, so people are flocking here,” Espe said. ‘’Even the typical safe havens are negative.’’
Policy makers last month debated an April rate hike, with several officials leaning against such a move because it would send the wrong signal and others saying it might be warranted, according to minutes of the Fed’s March 15-16 meeting released Wednesday in Washington. Fed Chair Janet Yellen last week said it’s appropriate to “proceed cautiously” in raising interest rates because the global economy presents heightened risks.
“It’s worth remembering that Yellen is currently driving the dovish bus,’’ said Gennadiy Goldberg, a rate strategist for TD Securities USA LLC in New York. “The cacophony of voices in the minutes are from the unruly kids making a fuss in the back.’’
Fed officials kept rates unchanged last month and scaled back forecasts for the pace of increases in 2016, after lifting off from near zero in December.
Futures signal a 20 percent chance of a Fed move by its June policy meeting, compared with a 54 percent probability assigned March 15, the day before the Fed released its latest policy statement. The calculation assumes the effective fed funds rate will average 0.625 percent after the Fed’s next increase.