Last Hurrah for Corporate Bonds

  • Why it matters

    Why it matters

    Many signs are pointing to a fairly imminent drop in an inflated bond markets, but for the moment, investors are still hanging in there.

  • Facts


    • Since the beginning of 2017, companies have raised over $1 trillion on the US and European bond markets.
    • Central bank operations in the bond markets have given rise to substantially inflated prices and depressed yields.
    • Many institutional investors are withdrawing from European corporate junk bonds, although the American market in low-rated debt is holding up.
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British American Tabacco has taken advantage of investor appetite for bonds before it's too late. Source: Picture Alliance / DPA

The low interest-rate environment on both sides of the Atlantic means people still remember the famous quotation from Charles Prince, former Citigroup chairman: “As long as the music is playing, you’ve got to get up and dance.” Bear in mind he said that shortly before the financial crash of 2007-2008.

Today’s situation is nowhere near as bad as it was then, when investors ploughed blindly into extremely risky financial vehicles, even as the property market began to wobble. By comparison, the economic situation on both sides of the Atlantic today is very good, and default rates for corporate debt are currently falling. But there are unmistakable warning signs that an insatiable appetite for corporate bonds will not do investors much good for much longer.

The numbers to date are impressive: Since January, companies in the United States and the euro zone have raised more than $1 trillion on the bond market, making 2017 a record-breaking year for corporate bond issuance. But most investors don’t feel entirely comfortable with the situation. “Everything is expensive,” complained Sebastien Page, head of asset allocation at the American fund manager T. Rowe Price.

This is the classic financial conundrum in a nutshell: Everyone knows that risks have increased enormously, but no one wants to cut and run from their positions just yet. Instead, the low interest-rate environment on both sides of the Atlantic means companies are making a killing asking for cheap cash, while the pressure for investors to generate yield remains enormous. But with central banks about to pull the plug, all of that sounds suspiciously like the last hurrah for corporate bonds.

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