Investors dare to dip back into bonds

Bonds are back, saying that investors who dare to buy into the market are overvalued.

Stabilization looms in debt markets this week, with 10-year US Treasury yields falling from peaks above 3% after a five-month path turned worse as stocks fell sharply. While most buyers anticipate more uncertainty should the US economy slip into a recession, bond prices have fallen to levels they consider too good to weather. offers a reliable alternative to stocks.

Some are targeting corporate bonds ranging from blue-chip names such as

AT&T Inc.


Ford Motor Co.

for satellite telecommunications operators garbage ratings

Dish Network Corp.

Others are buying mortgage-backed bonds or larger real estate loans for mall and factory operators.

“We finally flipped the switch, saying she chose bonds with attractive yields from investors,” said Elaine Stokes, a senior bond fund manager at Loomis Sayles & Co. Other investments are forced to sell according to market conditions. “That’s what we’ve been waiting for.”

Stocks and bonds have recorded a rare simultaneous decline compared to worst performing debt market in 40 years. Portfolio managers now see pockets of opportunity as they search for investments that will fare best in future volatility.

In the coming sessions, investors will study minutes from recent Federal Reserve discussions for further confirmation that officials plan to raise short-term interest rates. half a percentage point at the next few central bank meetings. They will also analyze earnings from pandemic favorites

Zoom Video Communications Inc.

together with the chip manufacturer

Nvidia Corp.

and retailers

Nordstrom Inc.


Macy’s Inc.

Bob Miller, co-manager of

BlackRock Inc.’S

A $44 billion Strategic Income Opportunity Fund, like AT&T’s investment-grade bonds, has fallen as much as 30% this year to as low as 78 cents to the dollar and yield up to 5%. This is close to their peak yield in March 2020, when the global pandemic rocked financial markets, according to data from MarketAxess, according to data from MarketAxess. Bond yields increase when prices fall.

Mr. Miller expects interest rates to continue to rise globally in the coming years, which will push the aggregate bond market lower. AT&T’s debt remains attractive as it plans to buy back existing bonds soon, which it has partially used to finance expand its 5G networkhe say.

Investors have historically held bonds to hedge against more volatile stocks, but that momentum has broken this year as Debt market and stock market fall together in anticipation of the Fed moving into more aggressive rate hikes. Higher interest rates have made existing bonds with low coupons less attractive, driving their prices down. Rising borrowing costs cause stock investors to recalculate the sky-high price of the shares they bought, often using credit to boost profits.

In the wake of the recent downturn, bonds look closer to bottoming than stocks, and “the possibility of fixed income acting as an equity buffer has increased,” says Financial Fixed Income Strategist at LPL, Lawrence Gillum said in a report Tuesday.

Yields on a major corporate bond index rose to 4.4% from 2.3% at the end of December – meaning the index is now much higher than the average yield compared to its lows at the end of December. the end of 2021, according to data from Bloomberg Inc. The additional return, or spread, that investors require to own them through U.S. Treasuries has recently been 4.44% above average, up from 32% below average at the start of the year. .

The risk to buy now is that high inflation could persist, forcing the Fed to push rates above current projections. Bank of America Corp analysts said in a report this month there was about a 40% chance that such a scenario would push the US economy into a deep recession and that “recession is predicted, the disparity between credit gap will widen further”.

Investors withdrew about $3 billion from junk bond mutual funds and exchange-traded funds this week but outflows from investment-grade corporate bond funds slowed to a trickle $300 million from about $7 billion a week earlier, according to Bank of America. Net outflows out of stocks increased slightly to $2.7 billion.

DJ Lucey, a portfolio manager at the Canadian insurer-owned investment firm, said SLC Management favors bonds backed by commercial mortgages because their spreads have significantly expanded.

Sun Life Financial Inc.


Do you think the worst pain from the rate hike is over? Why or why not? Join the conversation below.

“I am not necessarily of the opinion that there will be a soft landing [of the economy] but from a pure valuation standpoint, a lot of bad news is already priced in,” he said.

According to data from Bloomberg, commercial mortgage-backed bonds with low investment-grade credit ratings have an average spread of 4.2 percentage points against Bank bonds, about 8 percent higher. .4% above the average since 2008, according to data from Bloomberg. Bond yields are around 7%, up from 4.9% in early January.

The market for so-called dealer bonds consists of mortgage loans backed by government-backed giants

Fannie Mae


Freddie Mac

has also looked appealing to some investors in recent weeks.

Fears that the Fed might sell the dealer bonds it owns this year pushed its average spread on European bonds to 0.48 percentage points at the end of April, about 40% higher. against the average since 2008. Spreads have fallen back to average in recent days.

Christian Stracke, head of global credit research at bond fund giant Pacific Investment Management Co.

Others are bottoming out on junk-rated bonds that have lower levels as losses force some holders to sell. $3.3 billion bond issued by online used car marketplace

Carvana Co.

attracted hedge funds after it lost about 15% in a few days. About half of the bond has changed hands since it was issued in late April, and its yield has increased to 13.25% from 10.25%, according to data from MarketAxess.

Convertible bonds, which can be exchanged for shares, were among the types of bonds that were hit the hardest by the biggest hit from the stock sell-off. Those have some of the security of a bond while allowing the holder to get some profit if the stock price rises. Convertible debt of technology-related companies such as

Wayfair Inc.


Upstart Holdings Inc.


Lyft Inc.

down about 15% to 25% over the past four weeks, while automaker Ford’s convertible bonds are down about 13%.

“The uncertainty has created some real opportunities,” said Tracy Maitland, chief investment officer at Advent Capital Management, which manages about $10 billion in investments and sees the value of Ford bonds.

Convertible bonds typically offer lower returns than their conventional bonds to account for their embedded equity options. That momentum reversed briefly this month for companies with large stock declines like the fintech company.

Block Inc.

residential solar company

Sunnova Energy International Inc.


MicroStrategy Inc.

a software company that invests in cryptocurrencies, according to a Wall Street Journal analysis of data from MarketAxess.

Hedge fund manager Wasserstein & Co. purchased a convertible bond from a biodegradable plastics manufacturer

Danimer Scientific Inc.

, down about 19% over the past six weeks. The company’s claims about its products have been controversial, but the company’s assets exceed its liabilities, protecting bondholders, said Rajay Bagaria, Wasserstein’s chief investment officer.

Mr. Bagaria said that for now, Wasserstein is “sipping” the opportunities. The fund is holding about a quarter of its assets in cash or cash equivalents in preparation for further market movements.

Write to Matt Wirz at [email protected]

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