Last week, we poignantly noted that TINA was dead with respect to the US equity market as US Treasuries were trading at their ‘cheapest’ relative to stocks since 2011 offering an ‘alternative’ for investors dragged kicking and screaming into unprofitable tech at record multiples by asset-gatherers and commission-rakers inexorable urging…
Source: Bloomberg
But the global bond bloodbath – the worst on record this year…
…has offered up another ‘alternative’ asset-class for investors as negative yields have vanished from the world’s corporate bond market amid growing angst over central planners’ responses to an imminent global stagflation.
As Bloomberg reports, every single note in an index tracking the global investment-grade corporate bond market yielded 0% or more at Friday’s close, calculated using the mid point between bid and ask prices.
It’s a dramatic turnaround from August, when more than $1.5 trillion of debt, most of it in Europe, came with a sub-zero yield.
“This development makes the global credit market more attractive now,” said Christian Hantel, a senior portfolio manager at Vontobel Asset Management AG, which oversees fixed income worth 52.1 billion Swiss francs ($54.5 billion).
“We always maneuvered around these negative-yielding securities as they do not add value.”
And while barely-positive yields are anything but compensating for credit risk still, at the margin, it will mean inflows as sanity returns to credit markets…
“Ultimately it could draw investors back to higher-quality segments where yields now look compelling,” said Alex Eventon, head of investment-grade credit at Edmond de Rothschild Asset Management, which oversees 8.5 billion euros ($9.1 billion) of fixed-income assets.
As the chart above shows, we have seen negative-yielding corporate debnt disappear before – as the COVID crisis struck. But that was immediately rescued by central planners’ global interventionfest.
“For negative yields to return to euro investment-grade, a hiking cycle has to be priced out or reversed,” said Song Jin Lee, a credit strategist at HSBC.
“In that scenario, we are talking about a material growth slowdown, maybe even a Eurozone recession.”
Notably, until the last couple of weeks, the rise in corporate yields was as much driven by core sovereign rate increases as it was by a surge in credit risk compensation but most recently, it is the underlying soveriegn yields that have been blowing out as credit ‘improved’ modestly…
Any slowdown/recession scenario as noted above will likely flip that script rather rapidly with corporate risks rising as sovereign yields compress (unless Lagarde flip-flops faster than Powell in 2018 and restarts the ECB bond-buying bonanza… to save the world). Got gold?
