NEW YORK, July 26 (IFR) - Are US fund managers a collection
of manic-depressives swinging rapidly from one extreme to the
other? A cursory glance of the US corporate bond markets might
make you think so.
Just a few weeks after suffering one of the worst sell-offs
since the 2008 crisis, investors are back buying bonds as
ferociously as they dumped them in June.
So far this month more than US$75bn of high-yield and
investment-grade bonds have priced. Negative new-issue
concessions are back and deals are attracting as much as 10
times oversubscription and then tightening further in the
Although signs of fatigue started to show in the secondary
market last week, Triple C rated borrowers such as industrial
compressor manufacturer Gardner Denver still attracted
US$5bn of demand and locked in a near-record low 6.875% pricing
on its US$575m of LBO.
That is only 50bp away from the lowest ever pricing on an
LBO in the US and compares with the 8% area Denver was being
told to expect just two weeks ago.
Even financials, which have flooded the market with more
than US$40bn of deals in July so far, are luxuriating in an
overflow of investor interest. On Thursday Single A rated
Travelers Companies priced a US$500m 30-year bond at a
negative to flat new-issue concession when two weeks ago, Double
A plus rated GE Capital had to pay up 15bp of concession to sell
a three-year note.
"Two weeks ago you would have thought that the market had
definitely experienced a fundamental change, yet now it doesn't
look that way at all," said James Lee, senior high-yield credit
strategist at Calvert Asset Management.
"When I saw yields [on the Barclays high-yield index] go to
6.7%, I thought the next move would be 7%, and now we're back
down to 5.95%. Who would have thought it?"
After soaring from May 9's record low of 4.99% to June 25's
6.93%, the Barclays composite speculative-grade bond yield has
dropped to 5.95%, and looks on track to return to its 5.8%
average in the first quarter. The option adjusted spread was at
432bp on Thursday, only 7bp away from the May average of 425bp.
DAMNED EITHER WAY
It's not that fund managers have forgotten what it's like to
see their bonds plunge as much as 12 points in price, as some
did in June. Rather it is the classic damned if they do and
damned if they don't dilemma.
"You have to be involved, whether you like it or not," said
Lee. "You can't sit on cash if your competitors are putting
their cash to work and outperforming the index more than you
After a panicked US$60bn outflow from funds in June,
investors poured money back into high-yield and investment-grade
bonds in July.
Lipper reported a US$3.28bn inflow into high-yield funds and
ETFs in the week ended July 24, the second-largest inflow of all
time, trailing only the US$4.25bn and US$3.26bn inflows for the
weeks ended October 26 2011 and August 27 2003, and larger than
the previous week's US$2.67bn of inflows.
While the high-yield market is clearly the favourite,
investment-grade funds are also receiving inflows. Last week
about US$1.66bn of new cash poured into the high-grade market.
This is despite the fact that few believe rate volatility is
over - most of all issuers and their underwriters.
"A number of sophisticated frequent borrowers have moved
quickly to market," said Peter Aherne, head of North American
capital markets, syndicate and new products at Citigroup. "I
think there is a view that you could just as likely see a
reversal in markets as continued improvement."
Volatility around the FOMC meeting and the July non-farm
payroll number this coming Friday has been a driving factor
behind the rush of FIG deals in the past week.
Some fund managers put faith in past cyclical trends
pointing to tighter spreads, as well as the strength of a
secular move by the baby-boom generation out of equities and
into bonds as they retire. Corporate pension funds are also at
high funded rates thanks to the recent strong performance of the
equity markets, which is prompting them to derisk their
portfolios by selling equities at a profit and buying long-dated
"I not only think we can get back to the year's tights on
spreads but also go through those tights," said Michael Collins,
one of Prudential's senior portfolio investment managers.
"I think we will see both high-yield and high-grade
corporate bond spreads hit their cyclical lows over the next
couple of years," he said. "Look at what's happened with
high-yield spreads in just the last few weeks. In all past
cycles those spreads have hit 300bp, and we haven't even come
close to reaching that level yet, although I expect we will."
Collins expects the same to happen with high-grade
corporates, as rising rates bring more yield-sensitive pension
fund and insurance companies into the market, driving spreads
Investment-grade bonds have reached cyclical tights of
60bp-70bp in the past, compared with the 130bp level on the
Barclays index recently.
Even bouts of bond volatility are seen as buying
opportunities by many investors.
"We've seen new deals tighten in as much as 30bp from
initial thoughts to pricing, and if it doesn't make sense at
that point, we drop out," said Rajeev Sharma, portfolio manager
at First Investors Management Company.
"You might get the opportunity to get back in later, when
rates have backed out and the bonds are trading cheaper."
(This story will be published in the July 27 issue of
International Financing Review, a Thomson Reuters publication;
For other related fixed-income quotations, stories and
guides to Reuters pages, please double click on the symbol:
U.S. corporate bond price quotations...
U.S. credit default swap column........
U.S. credit default swap news..........
European corporate bond market report..
European corporate bond market report..
Credit default swap guide..............
Fixed income guide......
U.S. swap spreads report...............
U.S. Treasury market report............
U.S. Treasury outlook...
U.S. municipal bond market report......