Investors' return on U.S. corporate bonds has been falling since its August peak, but buying has only accelerated, especially in investment grade bonds that are offering historically low yields.
What's happening: Since hitting its 2020 high on Aug. 4, the benchmark Bloomberg Barclays U.S. bond aggregate has delivered a -2.2% return. (For comparison, the S&P 500 has gained 3.9% during the same time period.)
- However, investors have gobbled up bond mutual funds and ETFs. In September alone bond funds saw $50 billion of inflows, and drew $45 billion of inflows in the first two weeks of October, according to data from the Investment Company Institute.
What we're hearing: "Since the COVID-19-related meltdown, corporate investment-grade debt funds have attracted net new money each week since the fund-flows week ended April 15, 2020," Tom Roseen, head of research services at Refinitiv Lipper, tells Axios.
- "They do appear to be on track to replicate, if not beat, the net inflows from 2019."
- "2020 looks like it will be another banner year for the group."
- Refinitiv's data show investment grade bond funds and ETFs have drawn $168 billion of inflows this year.
Why it happened: Bonds have been highly sought after for years as older populations near retirement and the stock market had continued to rise, outpacing fundamentals and creating a historically long bull market that had investors expecting a crash.
- Then central banks slashed interest rates around the globe in response to the coronavirus pandemic, pushing investors out of government debt and into corporate bonds to generate yield.
What's next: Companies are poised to deliver significantly less debt in 2021, says Hans Mikkelsen, credit strategist at Bank of America Securities.
- He's expecting investment grade companies to issue between $800 billion and $1 trillion, the midpoint of which would be the lowest since 2011.
- He expects net issuance in 2021 to be around $326 billion, the second lowest since at least 2002, as fewer companies will need cash after 2020's record debt binge.
"We've never seen anything like this before, where companies have done so much refinancing in one year and also built this cushion of $360 billion in cash," Mikkelsen tells Axios.
- That will create an unprecedented "artificial shortage," he adds. "It's a bullish environment for spreads."
Yes, but: Bond issuance was expected to slow dramatically in Q3 as companies moved further away from the March selloff, but instead IG companies issued more than $267 billion of bonds, and high-yield companies sold more than $119 billion, per Dealogic.
- Both were the largest amounts for a third quarter on record dating back to 1995.