The world's biggest fixed-income investors, fed up with yieldson benchmark government bonds that pay less than zero percent, saythey've found a new haven from turmoil sweeping global markets:corporate debt.

BlackRock Inc., Glenmede Corp. and at least four other firmsthat collectively manage in excess of $4 trillion are putting moreof their money into the bonds of companies, contributing to arecord rally. The Bank of America Merrill Lynch Global Broad MarketCorporate Index, which tracks 9,542 debentures, is on pace to gain3.61 percent in July, the most since being created in 1997, and 14percent for the year including reinvested interest.

“You have rates markets like the U.S., the U.K. and Germanywhich look incredibly expensive,” Ewen Cameron-Watt, the chiefinvestment strategist for a unit of New York-based BlackRock, theworld's biggest money manager with $3.56 trillion in assets, saidin a July 17 conference call from London. The firm favors “stuffthat gives you a real yield,” he said.

Even though the global economy is slowing and credit-ratingdowngrades exceed upgrades, rising demand has allowed companiesworldwide to sell about $2.16 trillion of bonds this year, thesecond-fastest pace on record based on data compiled by Bloomberg.Instead of using the proceeds to expand and hire more workers asdesired by central banks that have cut interest rates to recordlows, companies are mainly refinancing existing obligations orhoarding the money.

The ratio of cash to total assets for companies in the Standard& Poor's 500 Index rose to about 10 percent from 5.7 percentfive years ago, data compiled by Bloomberg show.

AT&T Inc., the Dallas-based wireless carrier and biggestU.S. nonfinancial issuer of debt securities, has extended theweighted average maturity of its bonds to 15.6 years from 13.3years in 2009 while cutting the average coupon on its $64.4 billionof notes to 5.34 percent from 6.42 percent, according to datacompiled by Bloomberg.

“People are saying the economy is sluggish, but it's not so badthat companies are going to start defaulting left and right andgetting downgraded severely because they've got a lot of cash andhave funded out their debt maturities,” Martin Fridson, a globalcredit strategist in New York at BNP Paribas Investment Partnerswho started his career as a corporate debt trader in 1976, said ina telephone interview last week.

Double Yields

While investment-grade corporate bond yields are at record lowsof about 3 percent, that's more than double what governmentsecurities pay, Bank of America Merrill Lynch indexes show. Thegap, which ended last week at 2.05 percentage points, averaged 0.71percentage point in 2006 and the first half of 2007, before thestart of the worst financial crisis since the Great Depression.

Those rates are a powerful lure because government bond yieldsin the U.S., Germany and the U.K. are either below zero on anabsolute basis or after accounting for inflation. So-called realyields on 10-year Treasuries are about negative 0.2 percent.Similar measures are negative 0.48 percent in Germany and negative0.88 percent in the U.K.

Yields on 10-year Treasuries fell to a record 1.3960 percenttoday, according to Bloomberg Bond Trader prices. Five-year yieldsalso reached an all-time low of 0.5411 percent.

“Given that the risk-free rate is very expensive, you've got tosomehow generate some return,” Roger Bridges, who oversees $15.3billion as the Sydney-based head of fixed income at TyndallInvestment Management Ltd., said in a July 16 telephone interview.“Corporate bonds look very good.”

Bridges said he was considering buying bonds sold in Australialast week by Export-Import Bank of Korea. The three-year securitiespay 5 percent annual interest.

BlackRock's Cameron-Watt said he favored credit- andemerging-market debt. Glenmede, which is based in Philadelphia andoversees $20 billion, is leaning toward high-yield bonds, thoserated below Baa3 by Moody's Investors Service and less than BBB- atS&P, and developing-nation debt, Jason Pride, the director ofinvestment strategy, told Pimm Fox on Bloomberg Television's“Taking Stock.” on July 11.

High-yield corporate bonds globally have returned 1.53 percentthis month and 9.82 percent for the year based on the Bank ofAmerica Merrill Lynch Global High Yield Index. The firm's emergingmarket index has gained 2.92 percent in July and 11.8 percent forthe year.

Rising Sales

Companies have taken advantage of falling borrowing costs and arebound in confidence in credit markets.

The $2.16 trillion raised by borrowers from Fairfield,Connecticut-based General Electric Co. to South Korea's STXOffshore & Shipbuilding Co. is second only to the $2.44trillion that was issued at this point in 2009, data compiled byBloomberg show.

Investors are pouring money into credit markets even as theglobal economy slows, earnings growth decelerates and credit-ratingdowngrades exceed upgrades. S&P said it reduced the grades for$2.16 trillion of corporate debt worldwide in the first half ofthis year and raised $707 billion.

“We don't expect improvements by region or sector in theforeseeable future,” Diane Vazza, head of New York-based S&P'sglobal fixed-income research, wrote in a July 12 report.

The International Monetary Fund in Washington cut its 2013global economic growth forecast to 3.9 percent from April'sestimate of 4.1 percent as Europe's debt crisis prolongs Spain'srecession and slows expansions in emerging markets from China toIndia already facing weaker domestic demand.

With recent moves by central banks from the U.S. to Europe, andthe U.K. to China to ease monetary policies causing government bondyields to drop, “bond investors need to venture further out on therisk spectrum” to generate returns, Gene Tannuzzo, a money managerat Columbia Management Investment Advisers LLC, wrote in a reporton the company's website July 9.

Columbia favors investment-grade company bonds and agencymortgage-backed securities such as those issued by Fannie Mae,according to the report.

Corporate bonds have never been riskier. The duration of globalcompany bonds, a measure of price sensitivity to yield changes thatrises with longer maturities, reached a record of high 5.86 yearslast week, according to Bank of America Merrill Lynch indexdata.

'Headed Down'

An investor holding $10 million of Hartford-based UnitedTechnologies Corp.'s 4.5 percent debentures due 2042 would loseabout $565,000 if the yield increased to 4 percent from 3.7 percentnow, data compiled by Bloomberg show.

The danger for investors is that a slowdown will make it tougherfor borrowers facing declining earnings to service their debts.Companies in the MSCI World Index earned $92.49 per share excludingone-time gains or losses in the past 12 months, down from thisyear's high of $95.98 in February, data compiled by Bloombergshow.

Assets that carry risk are “headed down,” Bill Gross, who runsthe world's biggest bond fund at Newport Beach, California-basedPacific Investment Management Co., wrote on Twitter July 12. Hewrote in a separate Twitter post that real assets are a “betterbet” because Treasuries offer negative yields.

His $263 billion Total Return Fund had 52 percent of its assetsin mortgage-related debt, 35 percent in Treasuries and 13 percentin corporates on June 30, according to Pimco's website.

James Bianco, president of Chicago-based Bianco Research LLC,said he favors the safety of government debt.

“If you want to play it safer, you can go to the two-year note —it won't lose you money,” he said July 17 on Bloomberg Television's“First Up” with Susan Li. “But stocks can lose you money,commodities can lose you money, high yield can lose you money.”

With the U.S struggling with a $1 trillion budget deficits andshortfalls in Germany, the U.K., Canada, France and Japan, risingcorporate cash balances and declining leverage levels offer adegree of safety.

“Corporate credit is the place to be,” Gregory Peters, chiefcross-asset strategist at Morgan Stanley in New York, said July 10on Bloomberg Television's “Lunch Money” with Stephanie Ruhle andAdam Johnson.

The global speculative-grade corporate default rate stood at 2.7percent at the end of the second quarter, compared with ahistorical average of 4.8 percent since 1983, according to Moody's.The firm's Liquidity-Stress Index, which measures the ability ofcompanies to meet debt payments, was 3.6 percent in June, comparedwith a peak of 20.9 percent in March 2009 and the record low of 3.3percent last year.

'True AAA'

Barry Allan, who oversees C$6 billion ($5.9 billion) at MarretAsset Management Inc. in Toronto, is betting that corporate yieldswill decline below those of Treasuries as the U.S. falls back intorecession.

Allan favors companies rated AAA and AA such as Cincinnati-basedProcter & Gamble Co., New Brunswick, New Jersey-based Johnson& Johnson, Redmond, Washington-based Microsoft Corp. andMountain View, California-based Google Inc.

“These companies are the true AAA balance sheets,” Allan said inan interview.

Investment-grade corporate bonds have returned more than 3percent in one month only three times since 1997, gaining 3.3percent in July 2009, 3.2 percent in May of that year and 3.1percent in December 2008, according the Bank of America MerrillLynch index.

The gauge, which tracks bonds with a par value of $6.8 trillion,has advanced 7.31 percent this year, more than double the 3.55percent return of the index that tracks $22.5 trillion ofgovernment bonds and topping the 5.34 percent for the MSCIAll-Country World Index of stocks, including dividends.

3M Co. sold $650 million of five-year notes last month thatyielded 1.095 percent, or 37 basis points more thansimilar-maturity Treasuries. The St. Paul, Minnesota-based maker ofScotch tape and Post-It-Notes, which is rated AA- by S&P with a“stable” outlook, paid a spread of 65 basis points when it soldfive-year notes in September.

Anheuser-Busch InBev NV, the world's biggest brewer, sold $1.5billion of three-year notes this month at 50 basis points more thangovernment debt, compared with 87.5 when it issued similar-maturitybonds in March 2010. The Belgium-based maker of Budweiser beer israted A by S&P.

There's no danger of a bubble in company bonds because investorswill get their money back as long as they hold the securities tomaturity, said Marc Fovinci, head of fixed income in Portland,Oregon at Ferguson Wellman Capital Management Inc., which has $3.1billion in assets.

“We're comfortable with credit,” said Fovinci, who invests forwealthy individuals and for institutional clients. “We're happy tosoak up the additional yield.”

Fovinci said he bought bonds last week of Philadelphia-basedComcast Corp., the largest U.S. cable company, New York basedJPMorgan Chase & Co., the biggest U.S. bank, and Omaha,Nebraska-based railroad company Union Pacific Corp.

“We're not compelled to go into government bonds at one, one anda half percent yields,” Toby Nangle, head of multi-asset allocationfor London-based Threadneedle, which has the equivalent of $120.9billion in assets, said July 16 on Bloomberg Television's “ThePulse” with Maryam Nemazee. “We're reducing from equity, reducinggovernment bonds, adding to corporate bonds and high-yieldbonds.”

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