Bearish For Bonds?03.16.2012
The bulls have clearly piled into equities as they ride the risk on trade and S&P 500 higher and higher by the week. Gone are the worries over the debt crisis in Europe and fluctuations in interest rates. People are no longer looking for a way to safely store money but rather a strategic way to allocate capital.
This increased appetite for risk has led to a sell off across nearly all bond markets. Investors who were originally comfortable with AAA-rated debt securities and government debt are fleeing en masse. U.S. Treasurys have been selling off with the 10-Year Note trading around 94 – six points below par. Yields on the 10-Year are over 2.3% and climbing.
For now, the bearish trend in bonds has been primarily limited to Treasurys and AAA-rated or investment grade corporate and sovereign debt. Riskier corporate debt coming in between BBB and B ratings has attracted investors clamoring for higher yields. Despite the high-yield, default risk and interest rate risk remain low with most companies meeting or beating earnings expectations and the Federal Reserve’s low interest rate policy.
“Investors are bored of plain vanilla bonds that are safe and offer little-to-no yield. They want something sexier,” one debt trader from a major bank told Markets Media. “Those who aren’t already heavily allocated to equities are eyeing riskier corporate debt as a way to grab yield when other trades just aren’t offering it.”
Corporate debt has proved to be the exception in this bear market but it’s not alone. Municipal bonds are in a flux of sorts. Riskier munis are becoming increasingly attractive for investors. Conversely, safer muni issues are offering lower yields as investors shy away.
Signs of a revival emerged as green issuance picked up in the second quarter.
Average daily volume rose 20.4% to $1.2 trillion for the quarter.
Reductions in issuance costs could lead to an expansion of capital markets.
U.S. Treasury ADV rose 64% to $22.7bn, and credit ADV was up 15% to $12.3bn.
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