The Tell: Brexit let these investors grab a bigger piece of the pie

Yield got even harder to find after last week’s Brexit vote.

A global flight to quality after the U.K. voted to leave the European Union pushed the total amount of government bonds with negative yields to $11.7 trillion this week—a record amount.

But even as the total available yield in the global bond market shrank, investors that hold U.S. corporate bonds now have a bigger piece of the pie—the largest in at least two decades, said analysts Hans Mikkelsen and Ujwal Pradhan of Bank of America Merrill Lynch in a Wednesday note

The investment-grade bond universe across the world amounts to roughly $49 trillion in high-quality sovereign, quasi-government, corporate bonds and other collateralized debt obligations.

While U.S. corporate bonds worth around $5.9 trillion represent only 12% of that global market, , they are now responsible for 31.5% of its total effective yield payment, the note showed.

In other words, nearly one in three dollars paid out globally in the investment-grade bond market is paid to investors that hold U.S. corporate bonds.

That is the highest percentage in at least 20 years, as the following chart shows. That number is up from 28.5% before the Brexit vote, 25.6% at the beginning of the year and 15.8% before the financial crisis.

As yield opportunities are concentrated in U.S. corporate bonds, foreign investors crippled by ultralow and negative yields in Europe and Japan, have been flocking to the U.S. bond market, pushing bond prices higher and yields lower.

Also read: Here’s why investors bought S&P 500 bonds—not stocks—after Brexit

The pace of foreign buying of U.S. corporate bonds has increased steadily since Brexit last week—Wednesday being the most active day of foreign buying in the past month, the report noted.

What’s more, foreign appetite for U.S. corporate bonds is expected to remain strong, as government yields continue to tumble toward record low territory, said James Kochan, chief fixed-income strategist at Wells Fargo Funds Management.

And in turn, U.S. corporations are likely to embark on a new wave of bond issuance to take advantage of ultralow interest rates, thus supplying the hungry market with more paper, Kochan said.

Strategists project that interest rates will remain low for longer, as Treasury yields have been steadily declining over the past 2½ years, falling in eight of the past 10 quarters. Meanwhile, the negative-yield portion of the sovereign-bond universe continues to expand, as the following chart shows.

In this environment, corporate bonds offer an attractive spread, or yield differential, to Treasurys and other government bonds of similar maturity, and “with furthermore significant foreign uncertainties—as highlighted by Brexit—we think that it would be difficult not to be bullish,” the Bank of America report noted.

Adding to the corporate-bond rally is the fact that the notion of the “superiority” of sovereign debt was challenged this week after the U.K. was stripped of its AAA credit rating by S&P Global Ratings, even as the U.K. government bonds rallied, pushing the 10-year yield TMBMKGB-10Y, -8.21% below 1% for the first time in history.

Filed in: Top News Tags: 

You might like:

Market Extra: Bond market’s inflation gauge slides to lowest since Oct. 2017 as Fed meeting gets underway Market Extra: Bond market’s inflation gauge slides to lowest since Oct. 2017 as Fed meeting gets underway
Earnings Results: Micron shares drop as sales outlook falls $1 billion short of Wall Street target Earnings Results: Micron shares drop as sales outlook falls $1 billion short of Wall Street target
NewsWatch: Mnuchin thinks there’s a simple reason the Dow is poised for its worst December since 1931 NewsWatch: Mnuchin thinks there’s a simple reason the Dow is poised for its worst December since 1931
The Wall Street Journal: Judge softens his stance that CVS may have to halt Aetna integration The Wall Street Journal: Judge softens his stance that CVS may have to halt Aetna integration
Bond Report: 10-year government yield hits nearly 4-month low near 2.80% as Treasurys rally Bond Report: 10-year government yield hits nearly 4-month low near 2.80% as Treasurys rally
Outside the Box: It’s still possible to give to charity and save on your taxes Outside the Box: It’s still possible to give to charity and save on your taxes
The Wall Street Journal: Another apology from Facebook, as Sheryl Sandberg says it must do more to protect users The Wall Street Journal: Another apology from Facebook, as Sheryl Sandberg says it must do more to protect users
Currencies: Dollar struggles ahead of last Fed decision of 2018; commodity currencies crash Currencies: Dollar struggles ahead of last Fed decision of 2018; commodity currencies crash
© 2018 Stock Investors News. All rights reserved. XHTML / CSS Valid.