Crisis forgotten in bond-buying frenzy
Lenders do not seem to be good learners. To judge from the credit market, the 2008-9 crisis might never have happened. Perhaps this is the healthy fading of traumatic memories, but the current buying frenzy looks more like a return to an old bad habit.
It’s hard to find debt that investors don’t like. They are snapping up paper from solidly rated companies such as Wal-Mart and Anheuser-Busch InBev, and from still bankrupt Lyondell Chemical. The enthusiasm has reduced the spread on bonds dramatically.
In the panic-stricken days of March 2009, investment-grade U.S. corporate debt yielded 5.4 percentage points more than U.S. Treasuries. That spread is now just 1.5 percentage points, according to Barclays Capital. For junk bonds, the spread has declined from 17 to 6 percentage points.
The combination of thin risk premiums and the Federal Reserve’s near-zero overnight interest rates makes for unimpressive yields. Barclays clocks the average yield on high-grade bonds at 4.5 percent, which is two percentage points below the 20-year average.
Even traders should be wary. The Fed’s statement that the rate policy would remain for an “extended period” could disappear as soon as April 28. Even a nuanced shift in the direction of higher rates would end the game of ultra-easy money, pushing up Treasury yields in anticipation of a rate hike.
There would be some compensation. Since the Fed will move when the economy looks stronger, risk premiums would be apt to narrow further. But from the current levels, there’s not that much juice left for investors. The spread on investment-grade corporate debt now is just 20 basis points above its long-term average.
And suppose the Fed move does not presage a strong economic recovery. Then the current yields would look like a sucker’s bet.