UPS Packages ‘A’-Rated Bond As U.S. Corporates Deliver Yield

Investment-grade corporate bonds continue to attract investors despite recent market volatility, with a healthy slate of new supply continuing to satiate still-healthy risk appetite.

Bond investors have generally retained their interest in higher-quality corporate debt, while ongoing and escalating trade-related risks between the U.S. and China have spurred a plunge in U.S. Treasury yields.

For the week ended August 7, Thomson Reuters/Lipper U.S. Fund Flows reported a net inflow of roughly US$2.8bn into investment-grade corporate bond funds, while riskier, high yield funds saw net outflows of nearly US$4.1bn.

The yield on the 10-year U.S. Treasury note was bid at about 1.674% intraday Tuesday— a more than 33 basis point-wide inversion from the 3-month bill, which was trading at roughly 2.008%. 

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Moreover, high-grade corporate debt continues to lure global investors to the yield offered in the U.S. primary market – especially among those bond buyers who have been priced out of their local markets or have a dearth of available paper.

The yield on the 10-year German Bund, for example, has fallen to a low of around -0.613%, while the Swiss, French, Dutch and Swedish 10-year bond yields are all below zero.

In fact, the entire yield curves of Germany, Switzerland, France, The Netherlands, and Sweden have all turned negative.

‘A’-rated, long-dated debt at risk

Meanwhile, analysts at Barclays recently noted that the demand for long-dated U.S. debt “could come under pressure more broadly, with the precipitous decline in yields weighing on insurance/pension flows.”

Barclays observed that industrial 10s30s curves have steepened this year, but while ‘BBB’ curves are steep from a historical standpoint, the ‘A’ curves are not. In fact, they said, “adjusting for the level of yields, ‘A’ 10s30s spread curves appear flat.”

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The author does not hold any positions in the financial instruments referenced in the materials provided.

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