Funds flee German and Japanese bonds in search of yield. The haven of choice: the U.S., where corporate yields provide some shelter.
Institutional Investor
March 10, 2016
By Robert Stowe England
While volatility has roiled markets across the globe, investment-grade U.S. corporates have given investors some shelter from the storm. “They have provided a really nice anchor of stable yield,” says Ryan Brist, head of global investment-grade credit at Western Asset Investment Management Co. in Pasadena, California. “It’s a bit of the sun, the moon and the stars,” he adds, that are aligning to favor quality-credit U.S. corporates. Brist points to increasingly negative yields on government bonds in Japan and Germany as a force driving investors to higher U.S. yields. Plus, he says, U.S. corporate-yield spreads over U.S. Treasuries have risen this year to a level roughly 40 basis points higher than what it was for most of last year.
In the pursuit of better yields, international pension funds, which hold a big share of the world’s $7 trillion in negative-yielding government bonds, are seeking out U.S. corporate credits, according to Jeffrey Cucunato, managing director and head of investment-grade credit at BlackRock. “As long as that situation persists, I think there will be underlying demand. There is also an underlying fundamental comfort with the U.S. story.”
It’s not just investors in Japanese and German bonds making the move to U.S. corporates. It’s also cash investors and equity investors, according to Mark Kiesel, chief investment officer of global credit at Newport Beach, California–based Pacific Investment Management Co. Cash investors in Europe and Japan are facing the potential prospect that banks could charge them for deposits, Kiesel says.
On March 10 the European Central Bank set the amount it charges banks to hold cash overnight at -0.4 percent. In January the Bank of Japan introduced negative interest rates. Sweden and Switzerland also have negative rates. So far, banks have been reluctant to charge customers for deposits, except for a few very large depositors. “In any world where there is some inflation, cash is basically a negative-returning asset class,” says Kiesel. If depositors then also have to pay for banks to hold their deposits, it will make matters worse, and cash will lose money even on a nominal basis.
Equity investors, too, are facing a dilemma that might favor quality U.S. credits, “because monetary policy around the world is losing effectiveness at the same time nominal growth rates are slowing,” says Kiesel. That makes equity investing riskier and likely to see lower returns or even losses. Meanwhile high-grade U.S. corporates can offer equity-level 4 percent to 6 percent annual returns with less volatility than equities have, he contends.
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