It's hard to find safety right now in markets that are in disarray, but bond traders are certainly trying to do exactly that.

They're buying short-term debt that stands to lose when the Federal Reserve raises interest rates—but a hike next month isn't as much of a concern right now. And they're dumping risky junk bonds faster than their high-grade counterparts, sending the yield gap between the two to the widest in almost three years.

Traders are hunkering down, buying and selling less than average as they try to determine what's next for markets after more than US$5 trillion in global equity value was erased in less than two weeks.

There's “nothing normal about these economic or market conditions,” said Sharon Stark, chief fixed-income strategist for D.A. Davidson & Co. “We advocate patience,” since the selloff in riskier assets may deepen before the market finds its footing, she wrote in a Monday commentary.

Call it patience, or lack of liquidity, or just paralyzing fear. Whatever it is, bond traders certainly seem immobilized amid the turmoil. Fixed-income trading volume remains about 60 percent of what would be expected in an accelerating decline, Jim Vogel, an interest-rate strategist at FTN Financial, wrote in a note Monday.

High-yield bond trading has fallen 10 percent this month versus the same period in 2014, while the market overall has dropped 2.1 percent, according to data compiled by the Financial Industry Regulatory Authority and Bank of America Corp. Take bonds of Oasis Petroleum Inc.: Trading on only 10 days this month, they've tumbled 16 cents, to 76 cents on the dollar, as of 10:08 a.m.

(That said, junk-bond trading picked up a bit on Monday, as investors try to get rid of their energy and communications-related holdings in particular, Trace data show.)

As stocks from China to Europe plunge on concern global growth is slowing, investors are left to find havens in a bond market where yields have already been suppressed by central banks deploying stimulus around the world.

The flight to quality has sent the yield gap between U.S. investment-grade corporate bonds and junk notes to 4.3 percentage points, the biggest premium to own the riskier securities since November 2012, according to Bank of America Merrill Lynch index data.

Demand for the safest of assets, meanwhile, is picking up, with investors pouring $5.6 billion into money-market funds last week, according to data compiled by Wells Fargo & Co. Yields on five-year Treasuries dropped below 1.4 percent, the least since April, even as the Fed debates increasing benchmark rates from about zero, where they've been since 2008.

After all, there's a time to search for yield, and then there's now, which is more of a time to insulate yourself from losing all your money.

–With assistance from Brian Smith in New York.

Instant Insights /

Where Bond Traders Are Turning for Safety

Related Stories

Recommended For You