Corporate Bond Demand Drives Inflation-Adjusted Yields to Zero

Corporate Bond Demand Drives Inflation-Adjusted Yields to Zero

For the first time, U.S. corporate bonds are yielding less than expected inflation, highlighting how the demand for fixed-income assets is dampening their potential returns. This according to a recent article in The Wall Street Journal.

According to the article, “negative real yields on U.S. Treasurys drive investors to buy riskier assets in search of better returns. Many have turned to corporate bonds, driving yields to new lows in recent months, investors and analysts say.”

The article cites comments from Breckenridge Capital Advisors co-head of research Nicholas Elfner, who says investors are seeking incremental yield by figuring out how to balance corporate bond purchases relative to Treasury purchases.

The most recent dip in corporate bond yields, the article reports, “has been helped along by a burst of economic optimism.  Over the past month, yields on 10-year U.S. government bonds have climbed toward 1% in response to progress toward coronavirus vaccines and new spending legislation designed to tide the economy over until those vaccines are widely distributed next year.” The same developments, it adds, have triggered a rise in inflation expectations. “Even so, “it adds, “corporate-bond yields have fallen because the improved outlook has made investors more confident that businesses will meet their debt obligations. And for businesses, lower corporate-bond yields are welcome because it allows for borrowing at “rates that would have been unthinkable just a few years ago.”

Early in December, the article reports, Bank of New York Mellon issued $750 million of three-year bonds at a 0.386% yield, the “lowest ever for that maturity” (according to S&P Global Market Intelligence data). The article notes comments from Andrew Karp, head of global investment-grade capital markets at BofA Securities, who said that investment-grade corporate bond issuance is likely to dip next year because companies have already raised so much cash and extended their debt maturities. He added, however, that companies are “definitely still intrigued by the opportunity to lock in long-term rates at what are still historically attractive levels.”