The bond party is getting raucous

The relief rally as the Crimean crisis eased this week extended to corporate bonds. Tuesday saw nearly $20bn of issuance from 13 blue-chip firms, ranging from Gilead Sciences to Coca-Cola.

It was the busiest day for high-grade US corporate paper since Verizon’s $49bn offer last September, which remains the biggest company bond deal on record. Firms were keen to borrow after a dip in yields, which move inversely to prices.

What the commentators said

Recent years have been a “sweet spot” for corporate debt, said Vivienne Rodrigues in the Financial Times. Corporate debt is priced off government debt, where yields “have reached rock bottom”, as central banks have slashed interest rates.

Yield-hungry investors have poured in, buying a record $1.1trn of US corporate bonds last year, while the average yield has slid to 3%. European markets have been fizzing too. Bond issuance in the eurozone periphery rose 22% last year. Britain saw the best January since 2009.

But has the party gone a bit far? Just look at the riskier high-yield, or junk, end of the market. Yields in the US have slid to an unheard-of 5.1%, as investors reckon any yield will do in a zero-interest rate world.

Fitch’s Monica Insoll also noted “a worrying trend of reduced investor protections”, with covenants being negotiated away, a sign of overheating.

Times are “a bit too good” in the high-yield market, agreed Richard Barley in The Wall Street Journal. “Defaults… are noticeable by their almost total absence.” There were none in the US this year until 18 February. It has been 30 years since the first default arrived so late. Globally, too, defaults are running far below the usual pace.

All of which sounds great – but it strongly suggest that “loose monetary policy is simply storing up trouble for the future” as it has kept inefficient firms alive. With junk bonds eye-wateringly expensive, and monetary policy on the way to being tightened, the bond party’s days look numbered.

Merryn

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