Investors piled back into funds that buy risky corporate debt in the US, boosted by the prospect that a coronavirus vaccine could help lift the fortunes of some of the hardest hit companies.
Funds that purchase US high-yield bonds took in $3.3bn for the week ending November 11, according to data from EPFR Global, the most in a month. The inflows reversed the nearly $3bn withdrawn in the days around the US presidential election.
Pfizer and BioNTech announced on Monday that their Covid-19 vaccine was more than 90 per cent effective, which has helped push the average yield on high-yield bonds to a record low of 4.82 per cent this week, according to data from Ice Data Services.
The news came after Joe Biden was declared the winner of the US presidential election, despite the Democratic party falling short of a comprehensive “blue sweep” of Congress. Without a firm majority in the Senate, investors expect some of Mr Biden’s less market friendly policies, such as a sharp increase in corporate taxes, to be reined in, while still viewing the president-elect as offering more political stability on foreign policy.
Junk bond spreads, the premium in borrowing costs investors demand to hold the assets over haven government bonds, had already fallen from a recent high of 5.75 percentage points at the end of October to 5.05 percentage points at the end of last week on the result.
Bonds issued by Royal Caribbean Cruises, American Airlines, United Airlines and theatre operator Cinemark — among the companies jolted by the crisis — have rallied over the past week, according to trading platform MarketAxess. Royal Caribbean bonds that mature in 2028 changed hands on Thursday at 81 cents on the dollar, up from 74.5 cents last Friday, data from Finra showed.
“It’s been something to write home about,” said Jerry Cudzil, head of credit trading at asset manager TCW. “There has been a real rush into risk over the last week.”
This has helped push high-yield bond returns up from roughly flat coming into the month to about 3.5 per cent, erasing losses sustained during the heat of the pandemic-induced sell off in March.
Investors, starved of higher yields in safer assets such as US government bonds, have poured into corporate credit in the hope of generating better returns, even after the dramatic rally over the past week.
“You have to look at where the equity market is priced, where high grade markets are. Having an allocation to high yield will serve investors well,” Kevin Lorenz, a high yield portfolio manager at Nuveen, added.
Andrzej Skiba, head of US credit at BlueBay Asset Management, said that investors were shifting out of lower yielding areas of fixed income in search of the higher payouts on offer on junk debt. He added that weakness in the dollar and lower hedging costs were boosting the appeal of US credit for foreign investors, particularly those in Asia.
“Global saving pools are growing and people are desperate for yield,” he said. “People are realising fixed income does not give you the same return away from the high-yield universe.”
However, with the prospect of still elevated default rates, even with the recent vaccine announcement, investors also aired caution, suggesting the rapid decline in yields in the high-yield bond market was no longer compensating investors for the possibility of companies reneging on their debts.
“It’s risk without much return,” said Mr Cudzil. “It’s potentially extremely dangerous.”