Appetite for short-term bonds increases
The world's biggest buyers of corporate debt are seeking refuge in shorter-maturity bonds as concern deepens that a three-decade rally will end in losses as interest rates rise.
BlackRock Inc. is planning two actively-managed exchange-traded funds focused on short-term debt, with one seeking to have principal repaid within a year, the world's biggest money manager said in regulatory filings. Loomis Sayles & Co. has favored five- and 10-year corporate notes since April as it's shifted away from 30-year bonds at its Core Plus Fixed Income team, which oversees about $9.5 billion, said Peter Palfrey, a money manager at the Boston-based firm.
Debt from the most creditworthy borrowers has become more vulnerable with the extra yield investors demand to hold the notes rather than Treasurys declining an unprecedented 4.56 percentage points since the end of 2008, reducing the cushion that helps preserve gains when benchmark rates rise. Goldman Sachs Group president Gary D. Cohn said this week he's concerned some investors don't understand that bonds will lose value as benchmark yields inevitably climb from record lows.
"We do see a significant increase in appetite for shorter-dated, shorter-duration exposures," Edward Marrinan, a macro credit strategist at RBS Securities in Stamford, Connecticut, said in a telephone interview. "That's a trend that is gaining traction."
U.S. investment-grade corporate bonds that mature within one to three years have returned 0.28 percent this year, compared with a 0.52 percent decline for debt of all maturities, Bank of America Merrill Lynch index data show. Last year, the notes under-performed the broader market by 5.9 percentage points.
Average duration on the high-grade debt, which has gained an annualized 9.1 percent since the start of 1980, reached a record 6.95 years on Oct. 31 before declining to 6.8 years as of Monday, Bank of America Merrill Lynch index data show. That compares with 5.4 years in October 2008 during the worst financial crisis since the Great Depression and a 6.07 year average over the past decade.
Because prices of longer-maturity bonds are more sensitive to changes in current market yields than shorter-dated debt, an equal rise in borrowing costs reduces more value from longer-dated notes that pay a larger number of coupons.
"There is really only one way that interest rates can go," Cohn said Monday in a Bloomberg Television interview. "I'm concerned that the general public doesn't quite understand the pricing of bonds and interest rates and the inverse correlation between the two."
Elsewhere in credit markets, Walt Disney Co. raised $800 million in its first sale of floating-rate debt in almost five years. Sabre Inc. was said to have changed the structure on $2.23 billion of loans that the travel-technology provider owned by TPG Capital and Silver Lake Partners is seeking to refinance debt. Belize proposed extending maturities and cutting the coupon on the country's $544 million of defaulted debt as part of the Central American nation's second debt restructuring since 2007.
The U.S. two-year interest-rate swap spread, a measure of debt market stress, fell 0.18 basis point to 15.88 basis points. The measure narrows when investors favor assets such as corporate bonds and widens when they seek the perceived safety of government securities.