Investors are pouring record amounts into high-quality corporate bonds

Investors are piling into high-quality corporate bonds at record levels this year, reflecting their enthusiasm for an asset class that is normally viewed as relatively low-risk but is now offering the best returns in years.

According to data from the fund flow tracker EPFR, a total of €19bn has been invested since the beginning of 2023.

The flood of cash into the asset class underscores investors’ willingness to lock in historically high yields on the safest corporate bonds after a sharp sell-off last year, and the fact that they no longer need to venture into riskier corners of the credit market in search of decent yields.

“People generally think that fixed income generally looks a lot more attractive than it has in previous years,” said Matt Mish, head of credit strategy at UBS.

“The investment grade euphoria is basically this yield euphoria,” he added. “At least relative to the last year, and really relative to most of the last decade, [high-grade corporate debt] offers significantly higher returns.”

Average US investment-grade yields have risen to 5.45% from 3.1% a year ago after hitting their highest level since 2009 late last year. Most of this rise reflected a broad sell-off in fixed income over the past year as Bunds — like other major central banks — quickly raised interest rates to quell sky-high inflation.

Yields on more speculative junk-rated debt have also skyrocketed, but many fund managers say they prefer to stick with debt from companies that are better positioned to weather a potential economic downturn, as higher interest rates slow the economy .

“Clients look for investment grade first,” says Christian Hantel, portfolio manager at Vontobel Asset Management. “They’re quite cautious after burning their fingers last year.”

“They like to invest in riskier assets but are not willing to go all-in,” he added.

According to Henrietta Pacquement, Head of Global Fixed Income at Allspring Global Investments, the current environment means that “we don’t have to face any liquidity or credit quality challenges”.

Conditions so far this year have given companies a window to launch a credit spree, with proceeds of more than $182 billion from US investment-grade deals alone, according to data from Refinitiv. Just this week, pharmaceutical giant Amgen entered the market with a $24 billion sale to fund its acquisition of Horizon Therapeutics.

By comparison, US investment-grade issuance was just under $7 billion in December – with new business falling by a third in the second half of the year. In Europe, high-quality bond issuance has reached $246bn so far in 2023 – the best start to the year since 2012.

Still, a recent string of strong economic data in the US, combined with signs that inflation is still stubbornly high, could stifle recent enthusiasm as investors brace for further Fed tightening.

UBS’s Mish said the widely held belief that bond markets have reached “peak yields” has been challenged in recent days.

Futures markets are now reflecting bets for less than one US interest rate cut in 2023, after previously predicting the Fed would cut borrowing costs twice into December after a summer peak.

Goldman Sachs is already “slightly down on high-quality US corporate bonds,” analysts at the bank wrote this week, citing the “reemergence of cash as a competitive and viable alternative.”

“The easy money has already been earned,” said chief credit strategist Lotfi Karoui.

Additional reporting by Katie Martin