The Federal Reserve’s dive into corporate debt on Tuesday aligns the U.S. central bank with money managers around the world pivoting toward America Inc.’s bonds and away from its shares.
Exchange-traded funds investing in credit saw $2.4 billions of inflows in the past week, compared to outflows for equities, data compiled by Bloomberg show.
Funds targeting American stocks posted $9.3 billion of outflows in the period ending May 6, the most in six weeks, according to a Bank of America note citing EPFR Global data. The six-week inflow for high-yield bonds hit a record $32 billion.
It’s the “follow the Fed” mantra in action as investors fresh from the first-quarter turmoil seek safety higher up in the capital structure.
“We decided to reduce our global equity exposure in favor of global investment grade corporate bonds,” said Greg Perdon, chief investment officer of Arbuthnot Latham & Co Ltd. “We have preference for bonds that are going to benefit from central bank intervention. Investment grades might not have much of an upside, but they have a floor.”
The Fed facility beginning today is designed to purchase eligible credit ETFs — likely including an unprecedented bid for high-yield securities — as part of its emergency stimulus program to combat the coronavirus fallout.
Those measures have been a major catalyst behind the rebound in risk assets. The S&P 500 is up 31% from its March low. The spread on investment-grade U.S. bonds has recovered to 210 basis points from more than 370 basis points.
Even without Fed support, corporate debt has good form when it comes to recovering from a sell-off.
UBS Wealth Management reckons there have been 42 months since 1987 when high-yield spreads blew out past 800 basis points, as they did in March. The subsequent 12-month returns were positive on all but one occasion, with a median return of 24.5%.
It’s a similar picture in the investment-grade space. Of the 17 occasions since 1990 when spreads rose past 250 basis points, returns afterward were positive 14 times with a median of 15%. It’s one reason UBS Wealth says it’s neutral on stocks and sees opportunities in credit.
As far as Kevin Thozet at Carmignac is concerned, corporate bonds are attractively priced. The firm started increasing credit exposure at the end of March in part because of Fed support but also thanks to corporate actions designed to shore up balance sheets.