Treasury yields that are approaching record lows are sending
BlackRock Inc. (BLK), the world's biggest asset manager, and Morgan Stanley, one of the bond dealers that trade with the Federal Reserve, to corporate debt.
The 10-year yield of 1.51 percent is seven basis points, or 0.07 percentage point, from the all-time low set June 1. Bonds in an index of company debt offer yields that are 294 basis points more than Treasuries on average, Bank of America Merrill Lynch data show. Investor demand for corporate bonds has narrowed the gap, the so-called spread, from 348 on Dec. 31.
“Corporates, even high-yield corporates, are in pretty good shape,” said James Keenan, a managing director at BlackRock, which is in New York and invests $3.68 trillion. “The excess spread you're getting is pretty significant. And it's hard to see a lot of defaults without a significant economic recession,” he said yesterday on Bloomberg Television's “Market Makers” with Stephanie Ruhle and Erik Schatzker.
While economic growth slowed to 1.9 percent in the first quarter, it will quicken to 2.5 percent in the fourth, according to Bloomberg surveys of financial companies. The Fed has pledged to keep its target for overnight bank lending at almost zero at least through late 2014 and is extending the maturity of its Treasury holdings to put downward pressure on long-term government yields to fuel the expansion.
Outpacing Treasuries
“Corporate credit is the place to be,” Gregory Peters, chief cross-asset strategist at Morgan Stanley in New York, said yesterday on Bloomberg Television's “Lunch Money” with Ruhle and Adam Johnson. “That's what we're telling investors.” Morgan Stanley is one of the 21 primary dealers that trade directly with the U.S. central bank.
Treasuries have returned 2.5 percent this year, according to the Bank of America Merrill Lynch data, with investors seeking U.S. securities as a haven from slowing economic growth and a fiscal crisis in Europe. The corporate bond index gained 6.5 percent, the data show. It includes high-yield debt, those securities ranked below Baa3 by Moody's Investors Service and lower than BBB- by Standard & Poor's.
The term premium, a model created by the Federal Reserve that includes expectations for interest rates, growth and inflation, shows Treasuries are the most expensive ever. The gauge fell to a record low of negative 0.96 percent yesterday.
Investors as far away as Asia are starting to take note.
Treasury Alternatives
“Corporate and dollar-denominated sovereign bonds are more attractive than Treasuries,” said Tsutomu Komiya, who helps oversee the equivalent of $115 billion from Tokyo as an investor at Daiwa Asset Management Co., part of Japan's second-largest brokerage. “As long as the Federal Reserve keeps its strong easing policy, demand for bonds other than Treasuries will be strong.”
Company debt can help investors keep up with inflation, according to Boston-based Columbia Management Investment Advisers LLC, which oversees $344 billion. With consumer price increases running at an annual pace of 1.7 percent, 10-year Treasuries have a so-called real yield of negative 19 basis points.
“To earn a 'real' yield, or a yield above the rate of inflation, bond investors need to venture further out on the risk spectrum,” Gene Tannuzzo, a portfolio manager at Columbia, wrote in a report on the company's website July 9.
Columbia favors high-grade company bonds and agency mortgage-backed securities such as those issued by Fannie Mae, according to the report.
--Bloomberg News--
