(Bloomberg) — The party is not over for U.S. credit markets right now, and money continues to flow in.
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Risk premiums have been narrowing for most of this year, although they have risen slightly in the past week. The extra yield investors are seeking to buy junk bonds instead of high-quality ones has shrunk, suggesting default concerns are waning. A key measure of that difference was just 1.02 percentage points as of Thursday, near the lowest level in nearly two years, according to data compiled by Bloomberg.
Investors are finding a range of reasons to buy corporate bonds. Mixed economic data suggests the Fed has no reason to raise rates again, even if hopes for a rate cut have waned. Insurance companies that sell pensions and pension plans to fund retirees are keen to secure high yields and buy corporate bonds.
“What we're seeing is a general movement toward increased comfort with risk,” said Richard Chen, investment-grade portfolio manager at Nuveen. “Expectations for a soft landing continue to rise and macro forecasts remain optimistic,” he said in a phone interview Friday.
U.S. consumer sentiment recorded an unexpected decline in late February as the economic outlook worsened. But in recent weeks, the Fed's recommended inflation measure accelerated for the first time in a year, suggesting a recession is not on the horizon.
There are risks ahead. Investment-grade bonds have a relatively long duration, making them sensitive to interest rates if, for example, the Fed cuts rates much more slowly than investors expect. And asset managers are showing early signs that they will have their hands full selling high-quality bonds. Companies need to offer higher yields compared to existing securities to persuade fund managers to buy.
Still, for now, investors are flooding credit funds with money. For example, weekly inflows into U.S. investment-grade bonds averaged $6.4 billion in February, up 10% from $5.8 billion in January, JPMorgan Chase strategists led by Eric Beinstein said Friday. stated in the memo. Money has flowed into U.S. junk bond funds in seven out of nine weeks so far this year, according to LSEG Lipper data.
Bank of America expects a record $500 billion in inflows into high-end corporate bonds this year, with one of its strategists describing the situation as “booming.” Barclays strategists say up to $600 billion could move from money market funds into riskier assets, with credit likely to be favored over stocks.
Insatiable investor demand drove U.S. high-end corporate bond sales to record levels in January and February, topping $387 billion as of Friday. If March issuances remain reasonably strong, the first quarter could be the busiest period on record.
With this demand, the average spread on U.S. investment-grade bonds traded at 96 basis points on Thursday. Risk premiums have widened over the past week, but have shrunk by 0.03 percentage points since the beginning of the year. The average spread on junk bonds was 3.12 percentage points, down about 0.2 percentage points from the end of last year.
Barclays has a credit market fear index called the “Complacency Signal.” The measure remains elevated to 80%, its highest level since January 2022, strategist Andrew Johnson said in a note Friday. This action reflected lower realized volatility in high yield yields and lower distressed rates, partially offset by a modest decrease in high yield spreads.
“Bonds still look attractive,” said Sonali Peer, high-yield and multisector credit portfolio manager at Pacific Investment Management. “Even if GDP contracts slightly, the macro environment is still quite favorable for credit.'' ”
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1 week review
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U.S. blue-chip companies sold a record $172 billion in corporate bonds in February as lower yields encouraged investors to buy bonds and companies took advantage of relatively cheap borrowing costs.
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The strong investor demand driving American companies to borrow in the bond market is finally showing early signs of fatigue.
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As Europe increasingly beats the United States for global blue-chip companies seeking cheaper borrowing costs, investors are also increasingly clamoring for corporate bonds issued in a common currency.
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Potential tax incentives have led U.S. companies such as PepsiCo and International Business Machines to sell bonds through their Singapore subsidiaries, fueling a record surge in sales from borrowers in the city.
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Speculative-grade corporate bonds have outperformed nearly every other type of bond this year, and fund managers at T. Rowe Price Group and Barings expect that outperformance to continue.
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Goldman Sachs Group Inc. and Morgan Stanley are launching new secured loan debt deals to gain further market share in the once again booming business of helping companies package leveraged loans into bonds. are increasingly willing to temporarily hold some of the riskiest parts of the world.
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Chinese real estate giant Country Garden Holdings has been filed for bankruptcy in a Hong Kong court by an unknown financier who holds a small amount of its debt.
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State-owned companies in China's Guizhou province are selling bonds to help repay debt issued by local government lenders, in an unusual move that highlights the region's liquidity crunch.
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The recent default by China Nancheng Holding Co. Ltd. has renewed attention to so-called keepwell deeds, vague credit protection mechanisms widely used for offshore debt and similar to gentlemen's agreements.
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Japan's corporate bond market was the busiest since 2019 as yield premiums tightened.
move
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Allen Recon, head of direct lending at Carlyle Group, is leaving the company.
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Banco Santander SA has hired Tim Gross, head of U.S. leveraged loan sales for Bank of America Corp.
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UBS's Michael Mulholland has joined Royal Bank of Canada as director of leveraged credit sales in London.
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Fulkura Asset Management has hired Adam Burns, who most recently served as director of high-yield credit trading at the National Bank of Canada.
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Blackstone has hired Nakul Sarin from Bridgepoint's credit division to focus on UK direct lending.
–With assistance from Andrew Kostic and Taryana Odayar.
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