The world’s biggest fixed-income investors, fed up with yields on benchmark government bonds that pay less than zero percent, say they’ve found a new haven from turmoil sweeping global markets: corporate debt.
BlackRock Inc., Glenmede Corp. and at least four other firms that collectively manage in excess of $4 trillion are putting more of their money into the bonds of companies, contributing to a record rally. The Bank of America Merrill Lynch Global Broad Market Corporate Index, which tracks 9,542 debentures, is on pace to gain 3.61 percent in July, the most since being created in 1997, and 14 percent for the year including reinvested interest.
While investment-grade corporate bond yields are at record lows of about 3 percent, that’s more than double what government securities pay, Bank of America Merrill Lynch indexes show. The gap, which ended last week at 2.05 percentage points, averaged 0.71 percentage point in 2006 and the first half of 2007, before the start of the worst financial crisis since the Great Depression.
Companies have taken advantage of falling borrowing costs and a rebound in confidence in credit markets.
An investor holding $10 million of Hartford-based United Technologies Corp.’s 4.5 percent debentures due 2042 would lose about $565,000 if the yield increased to 4 percent from 3.7 percent now, data compiled by Bloomberg show.
Barry Allan, who oversees C$6 billion ($5.9 billion) at Marret Asset Management Inc. in Toronto, is betting that corporate yields will decline below those of Treasuries as the U.S. falls back into recession.