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US corporate bonds head for best monthly return in a decade

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Investors funnelled money into funds that buy higher-rated US corporate bonds in the past week, as the asset class headed for its best August return in almost 40 years.

US investment grade bond funds received $6.4bn of fresh cash from investors for the week ending August 28, taking total year to date inflows to more than $160bn, outstripping the $64bn registered at the same point last year, according to data from EPFR Global.

Weak economic data has helped to hold down benchmark US Treasury yields, and corporate bond yields have dropped in concert.

As a result, an investment grade bond index run by Ice Data Services had returned 3.2 per cent this month as of Thursday, on course for the highest one-month return in just over a decade and the best August performance since 1982.

“It’s been one of the best months for investment grade credit,” said Andrew Brenner, head of international fixed income at National Alliance Securities. “If you want to pick up some incremental yield you have to look to corporate bonds.”

Investors are walking a tightrope, however, seeking out higher yielding assets to generate returns while attempting to avoid investments at risk from the escalating trade war and a potentially slowing US economy, said Max Gokhman, head of asset allocation at Pacific Life Fund Advisors.

The yield on US investment grade bonds dropped 36 basis points to a three-year low of 2.84 per cent this month, according to Ice, but remains 1.24 per cent above benchmark Treasuries.

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A growing universe of negative yielding debt across the globe has also helped to bolster the attractiveness of relatively higher yielding US debt. A total of $17tn in bonds now carry a negative yield, with August seeing the total of corporate debt yielding below zero cross $1tn.

“When we see negative headlines coming out of other regions investors tend to seek out US investment grade debt which offers a bit more yield but still some safety,” said Mr Gokhman.

There was a modest $900m inflow into US high-yield bond funds over the past week, the EPFR data also showed, along with $800m added to emerging market bond funds.

By contrast, US equity funds suffered a second consecutive week of outflows, as investors withdrew close to $3bn.

Via Financial Times

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