A key area of the market is having one of its worst starts to a year since the 1990s
Fears of excessive valuations are pushing investors away from US corporate debt.
As such, US corporate debt is suffering one of its worst sell-offs in 18 years, according to JPMorgan research cited by Bloomberg, which shows that US corporate bonds just posted “their third-worst 100-day returns since 2000.”
Separately, t he Financial Times reports that “high-quality US corporate bonds had their worst start to a year in at least two decades.”
The continuing normalisation of interest rates around the globe is helping to drive the bond sell-off. This is particularly true in the US, where the Federal Reserve has increased its base six times since the end of 2015. The main Fed Funds rate is now between 1.5% and 1.75%, the highest rate since the financial crisis.
According to the FT, which cites the ICE Bank of America Merrill Lynch corporate debt indices, investors in investment grade US company debt have lost close to 4% this year as yields rise. In bond markets, prices move inversely to yield.
The more demand for the bond, the higher the prices go, and the lower the yield.
Bonds particularly at risk from the recent sell-off are those with a longer duration, which tend to suffer more than short dated bonds during monetary policy tightening cycles like the one we’re currently witnessing.
“Duration risk is the main culprit,” Greg Venizelos, a senior credit strategist at AXA Investment Managers told Bloomberg.
The corporate debt sphere has been a concern for many in the markets for some time, with one senior Federal Reserve official expressing worries about it back in April.
“If we have learned anything from the past, it is that we must be especially vigilant about the health of our financial system in good times, when potential vulnerabilities may be building,” explained Federal Reserve Board Governor Lael Brainard said in a speech at the time, pointing particularly to what’s happening in the corporate bond space.
JPMorgan, which issued the salutary warning about the corporate bond sell-off, noting that full year performance is unlikely to anywhere near as bad as the past 100 days, pointing to “strong demand among pension funds and overseas investors for long-dated notes,” according to Bloomberg.