U.S. investment grade corporate bonds offer relatively good income. This makes sense, as there is more risk in holding corporates compared to many sovereign bonds, agency mortgage-backed securities, asset-backed securities and municipals. You should be paid more for taking more risk. Sometimes corporates offer far more income than usual, like during the financial crisis of 2008. Yet when the world is a safe and predictable place, and corporate earnings are strong, income is lower. Corporates now offer more income than at any time in recent memory, relative to other global investment grade opportunities. During the financial crisis, U.S. investment grade corporate income was close to 20% of all global investment grade income; now we are approaching 35%, and the trend line is almost vertical!
What makes corporates so appealing?
Negative sovereign rates around the world are suddenly making U.S. corporate bonds the best option for many buyers. When a 10-year JP Morgan bond pays 2.95%, it looks pretty attractive versus a 10-year German bund that pays 0.00%. This is no typo–zero income! Bond investors love income, and because of this they are buying more U.S. corporate bonds. Investment flows are positive, credit spreads are tightening and prices for bonds are rising. Though this is great for corporate bond investors in the near term, trend lines won’t remain vertical forever and credit fundamentals will again become, well, fundamental. In the meantime, we will continue to invest in safe and predictable income when and where we can find it, and keep our eye on credit basics.
U.S. Investment Grade Yield Income as a Percent of the Global HG Broad Market
Source: BofAML, Bloomberg, SNWAM