Nike Fuels Move to Corporate Bonds as Government Debt Falters

  • Corporate ETFs draw money as government funds suffer outflows
  • Yield premium on company debt isn’t enough for Fukoku Mutual

Corporate bonds are outperforming government securities, even as both decline, as analysts say the world’s biggest economy is improving enough for the Federal Reserve to raise interest rates before year-end.

Company debt worldwide has fallen 0.1 percent during the past three months, compared with a 0.9 percent loss for sovereign securities, Bloomberg Barclays indexes show. Nike Inc. sold $1.5 billion of notes Tuesday, reflecting demand for higher yields than those offered by government bonds, some of which are below the rate of inflation.

“Do you really want to be holding long-term assets at negative real yields?” said Bill Bovingdon, chief investment officer at Altius Asset Management in Sydney, who has 30 years of experience in fixed income. “We’re still in that search-for-yield environment.”

The benchmark U.S. 10-year note yield was little changed at 1.75 percent as of 6:50 a.m. in London, according to Bloomberg Bond Trader data. The price of the 1.5 percent security maturing in August 2026 was 97 25/32.

Corporate bonds yield 117 basis points more than government securities on average, with investor demand for company debt compressing the difference to the narrowest in 16 months.

Below Inflation

Yields on two-, three-, and five-year Treasuries are all less than the rate of inflation, while those on 10-year notes are only 25 basis points above it, after accounting for consumer prices. Germany and France both have negative real yields.

Nike sold $1.5 billion of 10- and 30-year debt, based on data compiled by Bloomberg. The $500 million of 3.375 percent 30-year securities were priced to yield 93 basis points more than similar-maturity Treasuries.

U.S. exchange-traded funds that invest in corporate bonds have attracted $6.18 billion in the past month, according to data compiled by Bloomberg. Investors withdrew $107 million from government ETFs in the same period, the data show.

Narrowing Overdone

Fukoku Mutual Life Insurance Co. says the corporate yield premium has narrowed too much.

“I can’t say I’m bullish,” said Yoshiyuki Suzuki, head of fixed income in Tokyo, who helps oversee about $63.7 billion. “The current corporate spread is tight. I don’t want to increase the position.”

For an analysis of Fed Chair Janet Yellen’s latest comments, click here.

Traders see a 63 percent chance the Fed will boost interest rates at its Dec. 13-14 meeting. The calculation is based on the assumption that its benchmark will trade in the middle of the new band after the next increase.

“The Fed wants to raise rates,” Kathy Jones, New York-based chief fixed-income strategist at Charles Schwab Corp., said Tuesday in an interview on Bloomberg Television. “Although there may be a little bit of a nuance between how long they kind of stretch out the tightening cycle or how slow to move, the direction is up.”

— With assistance by Narayanan Somasundaram

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