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Vanishing Spreads Are Ringing Alarms in Risky Debt Markets

  • Concerns about a bubble grow as rates plumb new lows
  • Clients are saying ‘I don’t want to buy bonds, but I have to’
Yields that topped 44% in 2012 have fallen to less than 1%
Updated on

It’s rarely been a better time for borrowers with good credit to tap into the bond market. In fact, the same is true for borrowers with dodgy credit.

It’s not just U.S. Treasuries that are seeing near-historic low yields. Once-radioactive sovereign markets like Greece, high-tax U.S. states like New York and California, and corporate borrowers from investment grade to junk are being rewarded with yields that are barely above benchmarks.

With the record-long U.S. economic expansion on course to enter a 12th year, a swollen supply of investor capital flooding into markets is shrinking or eliminating risk premiums throughout the fixed-income landscape. It’s not that investors are oblivious to the eye-popping valuations. In fact, “bond bubble pops” was the second-most-cited risk in Bank of America’s latest survey of fund managers. Regardless, many investors ask, what choice do they have but to keep on buying?

“Things are frothy right now,” said Jude Driscoll, head of public fixed income at MetLife Investment Management, which oversees $586 billion in assets. “Risk assets are definitely priced at the tight end. In what world would you lend money to some of the profiles in high yield at 4%? That doesn’t make any sense to me from a historical basis. People are getting in because they don’t want to miss out.”