Gadfly

High-Grade Bonds Live (and Die) in Central Bank Shadows

Companies race to issue debt while the window's still open.
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Photographer: C. Woods/Express/Hulton Archive/Getty Images

It's not surprising that big companies are selling debt at an unprecedented pace.

In fact, it would be more shocking if they weren't. This is important to remember as U.S. corporate bond sales surpass $1 trillion in less than eight months this year, as Bloomberg News reported this week.

This glut of issuance is a predictable and intended consequence of central bank policies. It coincides with a boom in total assets held by policy makers in Japan and Europe. It does not represent a return of animal spirits, ebullience on the part of investors or a vote of confidence in global corporations. For many investors, U.S. high-grade bonds are simply the next best thing after developed-market government notes, which are increasingly hard to find and pay incredibly low yields.

In the past few years, central banks worldwide have accelerated their asset-purchasing programs. Six central banks now own about one-fifth of the government debt of the top developed nations.

Investors who are supposed to own high-quality debt are thus faced with a difficult question. Where are they going to find it? Top-rated U.S. company bonds have basically become proxies for government debt. And that's music to the ears of chief financial officers who are using this dynamic to finance anything and everything they can think of.

But to give a sense of how skeptical investors remain, just look at how there hasn't been a commensurate boom in U.S. high-yield bond sales this year. Such issuance is lagging behind the pace seen in 2013, 2014 and 2015.

Investors are clearly skeptical of how long this rally can continue. Yes, they're reaching for yield and buying more speculative assets, yet they're doing so with an ear wide open to the critics. Otherwise, their investment-grade bond purchases wouldn't make sense. If the economy were to expand more rapidly, owners of these bonds stand to lose a disproportionate amount. Not only would central banks be prompted to pare back stimulus more quickly, but ostensibly benchmark borrowing costs would rise in tandem with inflation. This would be hazardous for many fund managers who have concentrated more of their holdings in longer-dated bonds, which are more vulnerable to losses when benchmark rates rise.

So go ahead. Marvel about the amount of corporate debt sold so far this year. Worry about what happens when central bankers change their policies in earnest. But don't be surprised. This is all in central bankers' grand plan.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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