It’ll take more than this week’s steep sell-off in Treasuries to deter corporate bond investors. The global rout may actually boost demand from yield-hungry buyers.
As Treasury yields touched the highest in seven years this week, investment-grade spreads in the U.S. fell to their lowest since April, while junk traded at the tightest since 2007.
The thinking among investors is that the surge in U.S. government yields is due to strong economic data — the pickup in employment, wages and consumer confidence — and roaring growth should be a boon to corporate balance sheets.
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“Rates have moved up consistent with positive economic numbers — the backdrop for corporate credit is still favorable,” said Scott Kimball, Miami-based portfolio manager at BMO Global Asset Management, which has about $260 billion in assets.
And what many consider to be a slow march higher in rates may also attract credit investors.
“If we get a slow, controlled rise in rates like I think we really have, that’s very positive for credit,” Timothy Doubek, senior portfolio manager at Columbia Threadneedle Investments in Minneapolis, said by phone Thursday. “What we are seeing is an increase in participation from U.S. investors who are more yield-oriented,” said Doubek, whose firm had about $169 billion of fixed-income assets under management as of June.
Why Does Bond News Matter to Agents Who Sell Life Insurance and Annuities?
Life insurers are major users of corporate bonds. They use trillions of dollars in high-grade corporate bonds to back the obligations related to life insurance policies, annuities, disability insurance policies, long-term care insurance policies, and other products.
Shifts in the bond market tend to have the biggest impact on products with year coverage terms or benefit periods, because insurers often rely more on investment income, and less on premium revenue, to support those types of products.
Life insurers tend to prefer slow, steady increases in rates. Falling rates squeeze their yields. Sudden increases may lead customers to shift money to bank certificates of deposit, or other types of vehicles generally viewed as safe, if the spikes in rates make those products look like better alternatives to life and annuity products.
A large increase in issuer defaults could also hurt life insurers’ investment performance.
In recent years, the bond issuer default rate has been low.
However, bonds with the longest duration have the greatest sensitivity to changes in interest rates, and investment-grade securities with lower coupons and longer majorities have the longest duration. This risk can be seen in the benchmark $33.7 billion LQD ETF, with an 8.4-year duration, which has hit multiyear lows.