Begging For Yield in U.S. Spurs Biggest Bond Gains Since 2009

  • ‘People are begging for bonds’ and that’s not changing soon
  • ‘There’s a flight to quality into investment-grade credit’

U.S. corporate borrowers have rarely had it so good.

Investors from Paris to Milan are looking for a haven after the U.K. voted to leave the European Union. Central Bankers in Frankfurt and Tokyo have created $12 trillion of negative-yielding bonds, and money managers seeking higher returns have gravitated to the U.S. And highly rated U.S. corporate debt is about to post the biggest first-half gains in seven years, bolstering optimism that buyers will keep streaming in.

“People are begging for bonds, and for the foreseeable future I see that continuing,” said Henry Peabody, a portfolio manager at Eaton Vance, which manages $318.7 billion. “I don’t think investors ever stopped buying.”

Gains of 7.6 percent for the first six months of the year were led by bonds tied to the energy sector. Debt issued by pipeline owner Kinder Morgan Inc. returned 18.5 percent, according to Bank of America Merrill Lynch index data. U.S.-dollar notes of explorer Petroleos Mexicanos rose more than 12 percent.

It could get even cheaper for top-rated U.S. companies to borrow, with banks expecting investors will demand a smaller premium to own corporate debt over Treasuries.

“There’s a flight to quality into investment-grade credit as investors move out of equities, which are making them nervous, and investors perhaps move out of Treasuries, which have gotten too expensive,” Susan Scher, head of investment-grade capital markets at Goldman Sachs Group Inc. in New York said in a Bloomberg Television interview on Wednesday.

Strong investor demand allowed Molson Coors Brewing Co. to sell $1.8 billion of 30-year bonds at a record-low coupon for similarly-rated debt, according to data compiled by Bloomberg. The beer maker, which raised $5.3 billion in total, took advantage of Treasury yields that fell after the Brexit vote.

About $740 billion of investment-grade bonds have been sold in 2016, Bloomberg data show. At this rate, issuance for the full year is set to exceed the $1.3 trillion of debt sold in 2015, Scher said.

The average U.S. corporate bond yields 2.87 percent, while comparable European company notes yield 0.71 percent, according to Bloomberg data. Notes sold by developed countries yield 0.45 percent.

Even investors in traditionally ultra-safe European government debt may be looking to put cash elsewhere amid concerns about more fragmentation in the EU, according to Karyn Cavanaugh, a strategist at Voya Investment Management, which oversees $203 billion in assets.

“The risk premium is going to go up to be holding European bonds,” Cavanaugh said. “There’s going to be some pressure that’s going to drive investors away.”

‘Sheer Supply’

Although U.S. blue-chip company bonds might be more insulated from geopolitical risk than corporate or government debt from Europe, they’re not completely immune. Returns this year have whipsawed with oil prices. The extra yield investors demand to hold corporate debt over Treasuries climbed to as high as 2.21 percentage points on February 11, the day crude prices bottomed, before hitting year-to-date lows in May. 

One of the biggest risks to U.S. corporate debt may be that there’s just too much of it, said Todd Mahoney, head of fixed income syndicate Americas at UBS Group AG. He’s advising clients that want to issue bonds this year to come to market soon as spreads may widen.

“Eventually, I think we’ll start to buckle under the sheer supply that we’ve seen in our market,” Mahoney said.

For now, U.S. companies continue to take advantage of investor interest.

Investors put in orders for seven times the amount of bonds Molson Coors sold on Tuesday, said Mahoney of UBS, one of the managers of the sale. Oracle Corp. sold $14 billion of bonds in the year’s third-largest deal on Wednesday after receiving more than $30 billion of orders, according to a person with knowledge of the matter. It was the biggest bond sale since the market for corporate debt reopened following the Brexit vote.

“The U.S. is the best house in a bad neighborhood,” said Jim Keegan, chief investment officer of Seix Investment Advisors, which manages $25.9 billion.

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