The bond party is getting raucous

published 6 March 2014

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.

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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.

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.