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(Bloomberg) — Corporate bond valuations are in nosebleed territory, issuing their biggest warning in nearly 30 years as an influx of money from pension fund managers and insurers increases competition for the assets. So far, investors are optimistic about the risk.
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Many fund managers don’t see valuations coming back to Earth anytime soon. Spreads, the premium for buying corporate bonds over safer government bonds, may remain low for an extended period, in part because budget deficits have made some sovereign debt less attractive.
“You could easily say spreads are too tight and you need to go elsewhere, but that’s only part of the story,” said Christian Hantel, portfolio manager at Vontobel. “When you look at history, there are a few periods where spreads have remained tight for a while. We are currently in such a regime.
For some fund managers, high valuations are cause for alarm, and there are now risks including inflation weighing on company profits. But investors who buy these securities are attracted by yields that seem high by the standards of the past two decades and care less about how they compare to government debt. Some even see the possibility of further compression.
Spreads on investment-grade U.S. corporate bonds could tighten by as much as 55 basis points, Invesco senior portfolio manager Matt Brill said at a Bloomberg Intelligence credit outlook conference in December . They were indicated on Friday at 80 basis points, or 0.80 percentage points. Europe and Asia are also approaching their lowest levels in decades.
Hantel cited factors such as the index’s reduced duration and improving quality, the tendency for the price of discounted bonds to increase as they get closer to redemption, and a more diversified market as trends that will maintain tight spreads.
Take BB-rated bonds, which have more in common with investment-grade corporate debt than highly speculative bonds. They are close to their highest ever share in global waste indices. Additionally, the percentage of BBB bonds in investment-grade trackers – a major source of anxiety in previous years due to their high risk of being downgraded to junk speculation – has been declining for more than two years.
Investors are also focusing on carry, the industry term for the money bondholders earn through coupon payments, after any leverage costs.
“You don’t have to have a lot of spreads to approach double-digit returns” in high yield, said Mohammed Kazmi, portfolio manager and chief fixed income strategist at Union Banking. private. “It’s mostly a story of postponement. And even if you see wider spreads, you have a margin of safety thanks to the overall return.
Tighter spreads also mean that since the financial crisis, the cost of protecting against defaults – or at least the price of hedging market volatility – has rarely been as low as current levels. Fund managers have taken advantage of similar periods of falling prices in the past to build insurance, but so far the buying pressure has not been enough to increase credit default swap risk premiums .
Certainly, rising spreads have narrowed 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 weak balance sheets don’t pay much more than their stronger counterparts when they raise money.
However, it will take a significant change in dynamics to shake up risk premiums.
“While fixed income spreads are tight, we believe a combination of deteriorating fundamentals and weakening technical momentum would be needed to trigger a turnaround in the credit cycle, which is not our scenario base for the year ahead,” said Gurpreet Garewal, macro strategist and co-head of public markets investment insights at Goldman Sachs Asset Management.
Two week review
A host of blue-chip companies raised a total of $15.1 billion in the US investment-grade primary debt market on January 2, as underwriters prepare for what is expected to be one of busiest month of January in terms of bond sales. Another billion dollars in sales occurred on Friday, January 3.
Apollo Global Management Inc. and other financial heavyweights have won a key lawsuit, effectively undoing a financing deal they were excluded from for Serta Simmons Bedding, a company whose debt they held. Serta had authorized a handful of investors to provide $200 million to the company in exchange for an advance on the line to be repaid if the bed maker went bankrupt. The ruling could raise questions about whether further “upgrade” transactions will be permitted.
The Container Store Group Inc. filed for bankruptcy to deal with mounting losses and significant debt that has weighed on the chain.
Bankrupt retailer Big Lots Inc. won court approval for a rescue deal to save some of its stores from closure despite challenges from sellers who said the deal unfairly imposed heavy losses on them.
IHeartMedia Inc. said it has finalized an offer to exchange part of its debt, extending maturities and reducing principal, in a move that S&P said “amounts to a default.”
Carvana Co., an online used car seller that borrowed in the junk bond and ABS markets, was accused by prominent short seller Hindenburg Research of impropriety in a report alleging that the portfolio of The company’s subprime loans carry substantial risks and its growth is unsustainable.
Healthcare analytics company MultiPlan Corp. reached an agreement with the majority of its creditors to extend the maturities of its existing debt.
Glosslab LLC, a New York-based nail salon chain that experimented with a membership-based business model and attracted celebrity investors, has filed for bankruptcy.
Aerospace equipment maker Incora won court approval to exit bankruptcy after announcing that its main creditors had agreed to support a restructuring following years of acrimony following a notorious financing maneuver that pitted lenders against each other. to others.
Municipal bonds sold by colleges and charter schools have struggled to record levels in 2024, as the amount of state and local debt in default hit a three-year high.
Moving
Goldman Sachs Group has named Alex Golten as chief risk officer. Golten, earlier in his career, was responsible for credit risk at the company.
Morgan Stanley Direct Lending Fund has named Michael Occi as president, effective January 1, 2025.
Kommuninvest has appointed Tobias Landstrom as its new head of debt management.
