Pressure on Corporate Bond Market After Brexit Vote
Demand for U.S. corporate bonds grows among foreign investors looking for higher all-in yield, says Morningstar's Dave Sekera.
Demand for U.S. corporate bonds grows among foreign investors looking for higher all-in yield, says Morningstar's Dave Sekera.
Dave Sekera: In the near term, the corporate bond market will be pressured by the uncertainty to the global economic outlook caused by the U.K.'s decision to exit the EU. However, the combination of historically low interest rates and the ECB's asset purchase program will limit the amount that corporate credit spreads will widen.
Currently, there is over 11 trillion worth of sovereign bonds that are priced so high that if an investor purchases those bonds at current prices and holds them to maturity, they will lock in a guaranteed loss.
For example, the yield curve for Germany, Switzerland, and Japan are all negative past the 10-year maturity.
In addition, the ECB has expanded its asset purchase program to include nonfinancial corporate bonds. These purchases will effectively remove supply of corporate fixed-income securities from the public markets and create new cash that must then be reinvested. As this cash is then reinvested, traders will have to push prices up, thus lowering credit spreads, in order to buy bonds to reinvest the proceeds.
As the U.S. is one of the last major developed markets whose Treasury bonds still generate positive yields and with corporate credit spreads close to long-term averages, global investors are finding U.S. corporate bonds attractive as compared to fixed-income securities within their home countries. As such, we have seen increasing demand for U.S. corporate bonds from foreign investors who are attracted to the higher all-in yield corporate bonds offer as well as being invested in the safety of the U.S. dollar. We think that so long as other foreign central banks continue to pursue seemingly ever easier monetary policies, that U.S. corporate bonds will continue to hold their value.
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