Mutual funds scramble to buy corporate bonds
The scramble for investment-grade bonds has helped squeeze debt prices higher and reduced the amount of extra 'spread.'
How best to explain the recent run in investment-grade credit?
Analysts at Deutsche Bank AG have an idea. They point out that mutual funds have snapped up $275 billion worth of the bonds sold by companies with relatively stronger balance sheets in 2015 — far outstripping the net supply of new debt sold into the market. “The $275 billion increase in mutual funds’ credit holdings was twice the level of credit supply last year,” write analysts led by Dominic Konstam, Deutsche’s global head of rates research.
The scramble for investment-grade bonds, particularly new issues that typically outperform the wider market, has helped squeeze debt prices higher and reduced the amount of extra ‘spread’ investors demand to compensate them for added risk.
“Credit overweight by bond mutual funds is evident in total return performance, where most bond funds have outperformed the index since mid-February along with credit spread tightening,” write the Deutsche analysts. “Among the top 20 bond mutual funds that we track, 18 outperformed the index in total return over the past three months.”
The ‘big bondnanza’ is a theme also picked up by Rob Elson, Bloomberg strategist.
He notes that money managers’ allocations to corporate bonds reached a fresh all-time high last week at 36.3% of portfolios, according to the latest survey from Stone McCarthy. That data series has been running since 1999, when corporate bond allocations totaled a paltry 19.1%.
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