(Bloomberg) — Valuations of corporate bonds are in nosebleed territory, flashing their biggest warning in nearly 30 years, as an influx of money from pension fund managers and insurers increases competition for the axis. So far, investors are sanguine about the risk.
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Many money managers don’t see valuations coming back down to Earth anytime soon. Spreads, the premium for buying corporate debt rather than safer government bonds, may be low for an extended period, in part because fiscal deficits have made some sovereign debt less attractive.
“You can easily make a call that the spreads are too tight and you should go elsewhere, but that’s only part of the story,” said Christian Hantel, a portfolio manager at Vontobel. “When you look at history, there are a couple of periods when spreads have been tight for a long time. We are in such a regime at the moment.”
For some money managers, high valuations are reason to be alarmed, and there are risks now, including inflation that weighs on corporate profits. But investors who buy bonds are drawn to yields that seem high by the standards of the past two decades, and are less focused on how they compare to government debt. Some also see room for more compression.
Spreads on high-quality US corporate bonds could tighten to 55 basis points, Invesco senior portfolio manager Matt Brill said at a Bloomberg Intelligence credit outlook conference in December. They were indicated at 80 basis points on Friday or 0.80 percentage points. Europe and Asia are also approaching their lowest levels in decades.
Hantel cited factors including the index’s reduced duration and improving quality, the tendency for the price of discounted bonds to rise as they approach maturity and a more diversified market as trends that keep spreads tight.
Take BB rating bonds, which have more in common with blue-chip corporate debt than highly speculative notes. They are near the top of the global garbage index. In addition, the percentage of BBB bonds in high-grade trackers – a major source of anxiety in previous years due to their high risk of being downgraded to junk – has been declining for more than two years.
Investors also focus on carry, industry parlance for the money bondholders make from coupon payments after any leverage costs.
“You don’t necessarily need a lot in spreads to get close to double-digit returns” in high yield, said Mohammed Kazmi, portfolio manager and chief fixed-income strategist at Union Bancaire Privee. “It’s mostly a carry story. And even if you see wider spreads, you have the buffer from the all-in performance.”
Tighter spreads also mean that since the financial crisis, the cost of default protection – or at least the price of hedging market volatility – has rarely been as low as current levels. Fund managers have taken advantage of similar price periods in the past to build insurance, but so far there has not been enough buying pressure to increase default credit exchange risk premiums.
To be sure, the manifestation of everything in the spreads has reduced the gap between the strongest and weakest issuers in the credit market. Bond buyers are paid less for taking on extra risk, while companies with fragile balance sheets don’t pay much more than their more solid peers when raising money.
However, it will take a significant change in momentum to increase risk premiums.
“While fixed income spreads are tight, we believe a combination of deteriorating fundamentals and weakened technical dynamics would be necessary to trigger a turn in the credit cycle, which is not our base case for the coming year” , said Gurpreet Garewal, macro strategist and co-head of public markets investing insights at Goldman Sachs Asset Management.
Two weeks in review
A host of blue-chip companies raised a total of $15.1 billion in the US primary investment debt market on January 2, as underwriters braced for what is expected to be one of the busiest January for the sale of bonds. Another $1 billion in sales occurred on Friday, January 3.
Apollo Global Management Inc. and other financial heavyweights won a key trial, effectively announcing a financing transaction from which they had been excluded for Serta Simmons Bedding, a company that has debt. Serta had allowed a handful of investors to provide $200 million to the company in exchange for moving forward in the line to be reimbursed if the bed manufacturer failed. The decision may raise questions about whether other “uptiering” transactions will be allowed to happen.
The Container Store Group Inc. it filed for bankruptcy to deal with mounting losses and a substantial debt load that weighed on the chain.
Bankruptcy retailer Big Lots Inc. won court approval of a rescue deal to save some of its stores from closing despite challenges from retailers who said the deal unfairly saddled them with steep losses.
iHeartMedia Inc. said it completed an offer to swap some of its debt, extending the maturities and reducing the principal, in a move that S&P said was “default-prone.”
Carvana Co., an online used car dealer that has borrowed in the junk bond and ABS markets, has been accused by Hindenburg Research of prominent dealer impropriety in a report that says the company’s subprime loan portfolio company carries a substantial risk and its growth is unsustainable.
Health analytics company MultiPlan Corp. reached an agreement with the majority of its creditors to extend the maturity of its existing debt.
Glosslab LLC, a New York City-based nail salon chain that pioneered a membership-based business model and attracted high-profile investors, has filed for bankruptcy.
Aerospace supplier Incora has won court approval to emerge from bankruptcy after announcing that its main creditors have agreed to support a restructuring after years of acrimony over an infamous financing maneuver that pitted lenders against each other. other
Municipal bonds sold by colleges and charter schools became distressed at record levels in 2024, as the amount of state and local government debt reached a three-year high.
In Motion
Goldman Sachs Group named Alex Golten as Chief Risk Officer. Golten, earlier in his career, was a credit risk manager at the firm.
Morgan Stanley Direct Lending Fund has appointed Michael Occi as president, effective January 1, 2025.
Kommuninvest has appointed Tobias Landstrom as its new head of debt management.
