‘Stay Boring’: It’s How Bond Investors Are Riding Out Volatility

Global corporate bond investors are turning to shorter-dated investment grade debt to ride out market volatility after the worst week for the asset class since March.

(Bloomberg) — Global corporate bond investors are turning to shorter-dated investment grade debt to ride out market volatility after the worst week for the asset class since March.

With yields on 10-year Treasuries soaring as the prospect of higher-for-longer interest rates sinks in — and as new risks emerge from conflict in the Middle East — investors are staying cautious. That means buying bonds from safer, higher-rated issuers with shorter maturities and, for some investors, selling long duration, high yield bonds and hybrid securities.

“Stay boring. Euro short-dated investment grade corporates give you the best yield for risk,” said Altaf Kassam, head of investment strategy and research for EMEA at State Street Global Advisors.

His comments underscore a tumultuous period for global credit markets, with spreads on global corporate bonds widening eight basis points last week, the most since the banking-sector turmoil in March, according to a Bloomberg index. A strong jobs report on Friday added to concerns that Federal Reserve rate hikes are not over, while the risk of recession is still looming large.

This weekend’s shock attack on Israel by the militant group Hamas has spurred fears of instability in the region, adding another risk for investors to consider. A gauge of credit risk for European investment-grade corporate credit markets widened to 87.86 basis points on Monday, near the highest since May, following 5.9 basis points of widening last week.

With nerves on edge, investors have been eschewing longer-dated bonds despite the historically high yields they are offering.

“While I fully understand that it’s tempting to buy duration today, I’m not sure that we have seen the peak in yields,” said Stefan Hofrichter, chief economist at Allianz Global Investors, citing his expectation that rates will stay higher for longer. 

There’s also little incentive for investors to buy long duration debt when shorter-maturity bond yields are higher than longer-dated ones — the type of inversion that reflects investor unease about the economy.

“Nobody wants to buy the long end of the curve,” said Eric Vanraes, head of fixed income at Eric Sturdza Investments. “Why should I buy bonds below 5% which have higher duration when I can buy into money markets?”

Read: The 5% Bond Market Means Pain Is Heading Everyone’s Way

For others, the current risks in the market mean it’s time to sell junk bonds or hybrid notes.

Colin Graham, head of multi-asset strategies at Robeco Groep, said the money manager got out of long duration bonds recently, and has also been selling high yield corporate bonds. “We are just basically taking that back into investment grade,” he said.

Hybrid bonds — which have no, or very long, maturity dates and are treated as half equity and half debt by credit-rating companies — are also becoming less popular in the current risk-off mood.

Vanraes said his firm sold corporate hybrids last week. “It’s not like we don’t like them but if you get a deeper recession or a black swan, equity will suffer and high-beta bonds will suffer too.” 

–With assistance from Sujata Rao and Cecile Gutscher.

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