Corporate Bond Prices Approach Record

As investors pile in in search of yield, bonds’ sensitivity to rate changes jumps.

Corporate bond prices worldwide are poised to set a record as easy money policies by central banks push investors into riskier investments even with the potential for losses at about an all-time high.

Bondholders are paying an average of 110.22 cents on the dollar for the right to receive 100 cents back at maturity plus the interest from coupon payments, according to Bank of America Merrill Lynch’s Global Corporate & High Yield Index. At the same time, the so-called effective duration that measures how sensitive bond prices are to changes in yield has jumped, making the securities about the riskiest to hold ever.

Rate Swaps

The U.S. two-year interest-rate swap spread, a measure of debt market stress, fell for a second day, declining 0.41 basis point to 13.15 basis points, the lowest level since Jan. 16. The gauge narrows when investors favor assets such as corporate bonds and widens when they seek the perceived safety of government securities.

Mortgage Debt

Diageo’s sale consisted of $750 million of three-year, 0.625 percent debt to yield 35 basis points more than similar-maturity Treasuries; $650 million of five-year, 1.125 percent notes at a relative yield of 55 basis points; $1.35 billion of 10-year, 2.625 percent securities at a 95 basis-point spread and $500 million of 30-year, 3.875 percent debt at 105, Bloomberg data show.

Rate Risk

There are now 13,347 bonds with a face value of $8.91 trillion included in the Bank of America Merrill Lynch Global Corporate & High Yield Index, up from 10,082 issues with a value of $6.21 trillion at the end of 2008.

Credit Risk

The Netherlands seized the subordinated bonds of SNS Reaal NV, the country’s fourth-largest bank, after nationalizing the lender, whose soured real-estate loans threatened it with collapse. Cyprus wiped out bondholders of Cyprus Popular Bank Pcl and will force uninsured depositors to accept losses as it closes down the country’s second-largest lender in return for the nation’s 10 billion-euro ($13 Billion) bailout.

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