The bond party is getting raucous

Rampant bond-buying could well end in a hangover for investors.

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

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.

Recommended

Bonds
Glossary

Bonds

A bond is a type of IOU issued by a government, local authority or company to raise money.
19 May 2020
The charts that matter: inflation, bubbles, and booze
Economy

The charts that matter: inflation, bubbles, and booze

As US stocks head higher into bubble territory, John Stepek looks at the charts that matter most to the global economy.
23 Jan 2021
Inflation is the easiest way out of this – just don’t expect politicians to admit it
Inflation

Inflation is the easiest way out of this – just don’t expect politicians to admit it

The UK government borrowed £34.1bn in December, a record amount for that month. Britain's debt pile now amounts to 100% of GDP. How are we going to pa…
22 Jan 2021
Why bonds may not be the safe haven they once were
Investment strategy

Why bonds may not be the safe haven they once were

“De-risking” by shifting your portfolio into bonds used to make sense. But not so much any more, says Merryn Somerset Webb. So what should you do inst…
21 Jan 2021

Most Popular

Bitcoin does consume a lot of energy – but here’s why it’s worth it
Bitcoin

Bitcoin does consume a lot of energy – but here’s why it’s worth it

Some people question bitcoin’s legitimacy because it uses huge amounts of electricity to maintain its network. But that’s not a failing, says Dominic …
27 Jan 2021
Joe Biden’s spending spree will lift American spirits and markets – but it comes with a sting in the tail
US stockmarkets

Joe Biden’s spending spree will lift American spirits and markets – but it comes with a sting in the tail

New US president Joe Biden is planning to throw trillions of dollars in stimulus at his country’s economy. Markets will love that. But it comes with a…
25 Jan 2021
Think Tesla is a bubble? This might be the best way to bet on it bursting
Oil

Think Tesla is a bubble? This might be the best way to bet on it bursting

The huge rise in Tesla’s share price means that, by market value, it’s now the sixth-largest company in the US and and the world’s biggest car-maker. …
25 Jan 2021