The yield to maturity on speculative-grade corporate bonds worldwide fell to an unprecedented 5.96 percent yesterday, the first time the figure has dropped below 6 percent.
Borrowing costs have fallen 0.67 percentage point this year and compare with a record high of 23.2 percent in December 2008, according to the Bank of America Merrill Lynch Global High Yield index. In the U.S., yields fell to an unprecedented 5.993 percent yesterday, also the first time the figure has crossed the 6 percent threshold.
Investors are embracing riskier assets as the Federal Reserve holds benchmark interest rates near zero for a fifth year. High-yield dollar-denominated debt has returned an annualized 21.3 percent since the end of 2008, compared with 11.1 percent on investment-grade dollar-denominated bonds and 3.2 percent on Treasurys during the same period, Bank of America Merrill Lynch index data show.
“It’s a prolonged low interest-rate environment, where people need yield and are reaching for yield,” Marc Gross, a money manager at RS Investments in New York, who oversees $3.5 billion in fixed-income funds, said in a telephone interview. “What’s the alternative? And that’s the issue people are facing.”
“High yield had a remarkable run from 2009 onwards. It’s still doing well, the economy is still growing, interest rates are still low and they’re still pumping in liquidity,” he said.
The Fed has pledged to hold down its benchmark interest rate, set between zero and 0.25 percent since December 2008, as long as unemployment remains above 6.5 percent and the outlook for inflation is less than 2.5 percent.
High-risk, high-yield bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s.
The extra yield investors demand to own the riskiest U.S. corporate bonds rather than government debentures fell to 424 basis points yesterday from 534 basis points at the end of 2012 and compared with an average of 347 basis points between 2005 and 2007, index data show.
U.S. 10-year Treasury yields reached 1.778 percent yesterday, down from 2.06 percent on March 11, according to data compiled by Bloomberg.
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