As investors poured into corporate bonds, bond spreads collapsed

The premium between corporate bonds and U.S. Treasury bonds has fallen to its lowest level in more than a decade, indicating that investors are increasingly convinced that recent increases in inflation will not hinder economic recovery.

The collapse of the difference between investment yields (known as spreads) means that buyers are demanding a much lower premium for owning corporate bonds than before, which is more risky than the ultra-safe US Treasury bonds.

The spread between U.S. Treasury and corporate bond yields has narrowed significantly this year, as investors gained confidence and clamored to own assets with or even slightly higher yields in a low-return world.

The specter of rising inflation from mid-April to May brought pressure. This compression of spreads indicates that investors have a higher level of risk to corporate loans than the US government.

However, more and more investors are beginning to accept the Fed’s mantra that as the economy reopens after the pandemic, price increases will prove to be temporary, pushing down expected inflation indicators.

Adrian Miller, chief market strategist at Concise Capital Management, said: “The Fed has been controlling the temporary statement, which provides confidence for corporate bond investors.” “After all, corporate bond investors are more concerned about expectations. Strong growth path.”

Wednesday further strengthened confidence in the economic recovery because Fed officials signal Shifting to the eventual abolition of crisis policy measures has a more optimistic outlook for the rebound in the United States. Fed Chairman Jay Powell’s tougher tone-including the Fed’s comment that “price stability is half our responsibility”-helped to calm fears that inflation might run out of control, forcing the central bank to react more suddenly.

According to data from ICE BofA Indices, the spread between U.S. Treasury bond yields and investment-grade corporate bond yields fell 0.02 percentage points to 0.87% on Wednesday, the lowest level since 2007, and remained flat on Thursday. For high-yield bonds with lower ratings (and therefore higher risks), the spread fell by 0.05 percentage points to 3.12%. the following The last post-crisis low was in October 2018. It expanded slightly to 3.15% on Thursday.

The central bank’s easing policies through the pandemic crisis and the federal government’s multi-trillion-dollar pandemic assistance program have pushed interest rates to decline. According to a popular index run by Goldman Sachs, the financial situation in the United States is close to its lowest level on record, which has triggered a wave of riskier junk-level corporate borrowing.

So far this year, about 373 junk-level companies have borrowed from the nearly $11 trillion US corporate bond market, including companies that have been hit hard by the pandemic, such as American Airlines And cruise ship operators carnivalAccording to data from data provider Refinitiv, high-risk groups have raised a total of US$277 billion, a record rate and an increase of 60% from a year ago.

However, the decline in interest rate spreads and investors’ perceptions of risk are not enough to offset the overall rise in yields. As investors adapt to the Fed’s faster pace of policy tightening, the prospect of rising interest rates has pushed up yields.

Higher-rated bonds are safer, but provide a smaller spread to cushion the impact of investors on the rise in Treasury bond yields, and they tend to suffer more losses in an environment of high growth and rising interest rates. On the other hand, high-yield bonds tend to benefit because the booming economy makes the company less likely to go bankrupt.

“At present, people are not worried about price movements with higher yields at all,” said Andrzej Skiba, head of U.S. credit at BlueBay Asset Management. “The company’s performance is very good, and we have seen a meaningful recovery in earnings.”

Since the beginning of this year, the yield on investment-grade bonds has risen by 0.3 percentage points to 2.08%, while the yield on high-yield bonds has fallen by 0.27 percentage points to 3.97%.

Bank of America analysts predict that these two markets will continue to move closer, with investment-grade spreads expected to widen to 1.25% in the coming months and high-yield bond spreads to continue to fall to 3.00%.

However, while optimism about the U.S. recovery abounds, the continued enthusiasm for low-quality corporate debt has caused panic in some ways. Investors are worried about providing credit to unstable companies at interest rates that do not take into account the high level of risk involved.

“For us, it is very important that the yield of high-yield bonds provides an appropriate level of compensation for the credit risk of the investment. When the yield is so low, it naturally becomes more difficult to say,” Invesco High-Yield Investment Reese Davis, portfolio manager said. “It’s very simple-the lower the yield in the high-yield market, the more cautious investors need to be in the market.”