Last year’s sell-off in the investment-grade corporate bond market — where the most creditworthy U.S. companies borrow money — was one of the worst in history. This year: There aren't enough bonds to go around.
The big picture: A possible end to the current rate hike cycle — and the downward pressure those hikes put on bond prices — is coming into sight.
- That means that “all the pain that was caused last year by the Fed hiking is about to stop,” Matt Brill, Invesco's U.S. head of investment grade credit, tells Axios.
- The pending Fed pause, plus the higher absolute yields that IG bonds now offer — more than 5% on average — are luring investors back into credit.
- “We’re seeing inflows pick up, versus outflows last year. And all of a sudden, there's not enough bonds to go around, which is kind of crazy,” Brill says.
Between the lines: So far this year, a quirk in collective bond issuance is igniting even stronger bids in the secondary market, where $10 trillion worth of IG bonds trade.
What's happening: Corporate execs seem to think that rates will come back down soon-ish — so they're shying away from issuing longer-term bonds that lock in current market levels.
- The evidence: The share of bonds issued this month with maturities in just five years is much higher than usual, while the share of bonds maturing in 20 or more years is significantly lower, data from PitchBook LCD shows.
The impact: Investors tend to like longer-term paper because there's less reinvestment risk. As a result, the relative scarcity of 20+ year bonds in the new issue market has lit up demand for long-dated bonds trading in the secondary market at depressed dollar prices, Brill says.
- These bonds, issued by giants like Apple or Morgan Stanley at rock-bottom rates in 2020-2021, sank to prices in the 60 to 70 cents on the dollar area last year. But in recent months, many have gained 10 to 15 points from their lows.
Where it stands: IG bonds are having their best start to the year in at least a decade (check out the chart above).
What to watch: One thing that could stop the rally in its tracks? A hard landing for the economy.