High risk no answer to negative yields

For bond investors, there’s something inherently offensive about negative-yielding debt, even though it’s nothing new by now. Conceptually, buying a security that effectively guarantees a loss if held to maturity goes against the core purpose of fixed-income investing — preserving principal and earning steady interest payments that exceed the inflation rate.
Across the globe, the amount of debt with negative yields has grown to more than $10 trillion, a level last seen in 2016, a period many strategists said marked the peak of the bond bull market. Naturally, investors are looking for lessons from that past episode about which fixed-income assets will perform best. At first glance, the winner from a return to ultra-low yields would seem to be US junk bonds, which returned 17% in 2016, the most since the market sharply rebounded from the financial crisis. Indeed, high-yield debt has already returned 6.9% this year, and investors just poured an additional $1.8bn into junk-focused funds through March 20.
Such an indiscriminate rush to risk would be misguided. While recent inversion of yield curve for three-month and 10-year Treasuries doesn’t necessarily mean a recession is imminent, it does serve as a reminder that market cycle will inevitably draw to a close.
In the minds of some strategists, the decline in junk bonds is coming sooner rather than later. In a report this week, Noel Hebert and Anna Constantino at Bloomberg Intelligence wrote that “weaker economic growth remains our base case, which may mean high-yield bond prices have already peaked.” UBS credit strategists echoed that view, saying that “the rally in US speculative grade credit is essentially over.”
A Bloomberg Barclays index tracking triple-A rated US company debt rallied by 0.86 percent on March 22, the strongest one-day return in almost 10 months. By contrast, high-yield securities fell, snapping a nine-session win streak. Similarly in Europe, triple-A corporate debt outperformed all other investment-grade tiers as German bund yields fell below zero.
Granted, there aren’t many top-rated corporate securities left in the world — Microsoft Corp. and Johnson & Johnson make up the majority of both the US and European indexes. But the same concept applies to investing in bonds from Apple Inc., rated just one step below triple-A, or Walmart Inc., rated one level below that. A Walmart bond due in June 2028 still yields more than 3 percent, compared with 2.4 percent for 10-year Treasuries. In Europe, Apple debt that matures in January 2024 offers a 0.11 percent yield, compared with negative rates for five-year sovereign debt from Austria, Denmark, Finland, France, Germany and Sweden.
Those investments don’t seem particularly exciting when compared with indexes of junk bonds in the US and across Europe, which yield 6.5 percent and 4.4 percent, respectively. But they’re also less likely to crumble if the concerns over a global economic slowdown prove correct while providing somewhat larger returns.
—Bloomberg

—Bloomberg

Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News