US investment-grade corporate bond funds are set to chalk up one of their three best years on record for inflows in 2019, even as the extra returns on offer have shrunk and some Federal Reserve officials expressed concern over mounting risks.
Investors have poured $180bn into the funds so far this year, trailing only 2009’s $246bn of inflows and 2017’s $210bn, according to Refinitiv Lipper data on Wednesday.
The rush into the US corporate bond market reflects investors’ ongoing need for yield at a time when interest rates remain at very low levels.
The minutes of the Fed’s rate-setting committee meeting last month, which were published on Wednesday, said that several officials had used the meeting to warn that “imbalances in the corporate debt market had grown over the economic expansion”.
They also said several officials “raised the concern that deteriorating credit quality could lead to sharp increases in risk spreads in corporate bond markets” and that “these developments could amplify the effects of an adverse shock to the economy”.
Such concerns have been shared by several high-profile fixed income investors.
Dan Ivascyn, chief investment officer of Pimco, and Scott Minerd, global chief investment officer of Guggenheim Partners, are among those steering clear of US corporate bonds.
“We believe that corporate credit is fundamentally weak and could overshoot to the downside if the economy deteriorates,” Mr Ivascyn said in an interview with the FT last month.
Asked about the latest warning flags from the Fed minutes, bond investor Jeffrey Gundlach, chief executive of DoubleLine Capital, told the Financial Times: “They are right for once, but clearly the Fed’s policies deserve a good part of the blame. All major central banks have significantly abetted debt growth by keeping rates at unheard of low levels.”
S&P Global Ratings also warned on Wednesday that the ratio of business-sector credit to US gross domestic product is at the highest in half a century, and “any deterioration in asset quality toward more normal levels will likely boost loan-loss provisions from relatively low levels”.
The premium paid to investors above US Treasuries on investment-grade bonds fell to 1.09 per cent on November 7, its lowest level since April last year, and was still just 1.11 per cent on Wednesday. The spread measures the extra yield — or lack thereof — investors demand to compensate for corporate credit risk.
Companies have taken advantage of low borrowing costs to raise cash from investors for acquisitions, to buy back stock and to refinance debt that will be maturing in the near term.
Total corporate bonds outstanding rose to $9.5tn at the end of the second quarter this year, according to data from Sifma. That is up from $9.1tn at the end of the second quarter in 2018.
Net debt issuance has been declining in recent years, however, as the pace of new bond and loan sales has slowed and more investment-grade companies have turned to paying down existing debt.
“Companies took advantage of that low-rate environment, it was the prudent thing to do,” said Andrew Forsyth, a portfolio manager at BNP Paribas Asset Management. “Corporate balance sheets, by and large, are still in decent shape.”