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Corporate Bond Investors Undaunted by Jump in Borrowing Rates

Corporate Bond Investors Undaunted by Jump in Borrowing Rates

  • High-grade bond spreads near the lowest level since April
  • Falling prices could bring in more buyers from sidelines

While they have rattled stocks, rising rates haven’t shaken the corporate bond market.

The spread between U.S. corporate bond and Treasury yields remains near the tightest level in six months, a sign there’s still a healthy appetite for the securities.

“It certainly has been an orderly little bit of a back-up and nothing to get too worked up about,” said Lon Erickson, managing director and portfolio manager at Thornburg Investment Management Inc. in Santa Fe, New Mexico. “From an all-in yield perspective, I suppose it’s an opportunity in terms of getting more bang for your buck than you have for a while.”

IG spreads remain near six-month lows despite slight rise as rates fell this week

Credit spreads, a measure of risk premium, widened slightly this week after a five-day pause as Treasury yields retreated from seven-year highs, yet remain near six-month lows.

Many investors see the orderly rise in rates as sign of a healthy U.S. economy -- which has seen the lowest unemployment in decades, growing wages and consumer confidence -- typically a boon for corporate balance sheets. And the tick higher should also attract buyers that have sat on the sidelines waiting for rich prices to fall.

“Credit is just mirroring what Treasuries are doing,” said Tim Doubek, senior portfolio manager at Columbia Threadneedle Investments in Minneapolis. “If anything, rates going higher is a tailwind.”

Higher Treasury yields and stable credit spreads have pushed bond yields higher

But there’s always a risk yields spook companies from selling debt and cost others that need to refinance.

Rising rates have sent investment-grade bond total returns to the worst of any fixed-income asset class so far this month, and this has scared some individual investors.

The iShares iBoxx $ Investment Grade Corporate Bond ETF saw nearly half a billion dollars of outflows on Tuesday, and the U.S. aggregate bond ETF saw the single biggest outflow in the fund’s 15-year history.

The picture isn’t always clear in high-grade credit. “You need to be cautious and selective in your choices -- it’s not just a ‘go buy the market,”’ Erickson said.