The amount of money flowing into bond funds is poised to exceed the cash that went into stock funds during the internet bubble, stoking concern fixed-income markets are headed for a fall.
Investors poured $480.2 billion into mutual funds that focus on debt in the two years ending June, compared with the $496.9 billion received by equity funds from 1999 to 2000, according to data compiled by Bloomberg and the Washington-based Investment Company Institute.
Concern of the global economic recovery is faltering, with the US growing at a slower-than-forecast 2.4 per cent pace in the second quarter, is prompting investors to pile into fixed-income securities of all types even with some yields at record lows. The new cash has helped fuel a rally and drove yields on investment-grade US corporate debt down to a record 3.79 per cent last week, while two-year US Treasury yields fell to an all-time low of less than 0.5 per cent.
The money flowing into bonds is “probably not repeatable on a consistent basis,” said Joel Levington, managing director of corporate credit in New York at Brookfield Investment Management, which oversees $24 billion. “Eventually it won’t be sustainable. Whether that means five years from now or five weeks is a little difficult to tell,” he said.
Accelerating returns
Bank of America Merrill Lynch’s Global Broad Market Index, which tracks more than 19,100 bonds of all types with a market value of $37.6 trillion, has gained 1.31 per cent this month, the best since July 2009. The index is on track for an annual return of 10.2 per cent, which would be the best since the measure was created in 1997.
The 10 lowest-yielding US corporate bond deals ever were sold in the past 14 months, according to Deutsche Bank AG, with International Business Machines Corp issuing $1.5 billion of three-year notes on August 2 with a record-low one per cent coupon.
Elsewhere in credit markets, the cost of insuring against losses on European corporate bonds fell.
The Markit iTraxx Crossover Index of credit-default swaps on 50 mostly junk-rated companies dropped 9.8 basis points to 496.6 as of 10:26 am in London, according to Markit Group. The index is a benchmark for the cost of protecting bonds against default and a decline signals an improvement in investor perceptions of credit quality.
Credit-default swaps insuring debt of two of the world’s largest mining companies tumbled on investor optimism Australia will scrap proposals for a tax on the industry.
Mining tax
Horse-trading following an indecisive election result may lead politicians to abandon plans for the tax, which would place a 30 per cent levy on iron ore and coal producers. Default swaps on debt sold by BHP Billiton, the Melbourne-based No. 1 miner, fell 10 basis points to 106.7, while contracts on Rio Tinto in London dropped 4.7 basis points to 101.3, according to data provider CMA.
The cost of debt insurance on SABMiller Plc rose to the highest since July 8 after a report that the world’s second- largest brewer may make a £7-billion ($10.9 billion) bid for the beer division of Foster’s Group.
Credit-default swaps on SABMiller climbed 12 basis points to 88, CMA prices show. The London-based company may make the offer for the Carlton & United Breweries division before it’s split from Foster’s wine business next year, the Sunday Times reported yesterday, without saying where it got the information.
Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Yield spreads
The extra yield investors demand to hold global corporate bonds instead of government securities shrank one basis point last week to 176 basis points, or 1.76 percentage points, according to Bank of America Merrill Lynch’s Global Broad Market Corporate index. Spreads have narrowed 25 basis points since this year’s peak on June 11. Yields fell to 3.51 per cent on August 20, from 3.59 per cent the week before, the data show.
Corporate bond issuance worldwide declined last week to $35.9 billion, from $55.6 billion in the five days ended August 13. Companies have sold $1.92 trillion of bonds this year, compared with $2.68 trillion in the same period of 2009.
