(Bloomberg) — Major U.S. bond investors have aggressively shifted money into long-term bonds, on the assumption that the unloved asset class will be among the winners from any rate cuts.
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The 20 largest U.S. mutual fund managers have increased duration over the past two months as yields rose, according to research from JPMorgan Chase & Co. Investors have been building positions by piling into high-quality corporate bonds to avoid negative carry. of government debt, said Nikolaos Panigirtzoglou, a global market strategist at the lender.
Long-term corporate bonds are winning back investors who fled as the market scaled back bets on an upcoming Federal Reserve easing. Now the appeal is returning as markets price two rate cuts this year after data showed US inflation would ease for the first time in six months.
“History shows quite consistently that yields rise sharply from three to four months before the Fed actually starts cutting,” said Gershon Distenfeld of AllianceBernstein Holding LP, who recently extended maturity on the $23 billion U.S. income portfolio he manages . That could happen “in a month or two, in six months, or as late as 2025,” he said.
The “everything but bond trading” may now be over and long-term debt will make a comeback in the second half of the year, Bank of America Corp. strategists wrote. in a note published Friday.
According to a survey by the lender, fund managers have increased their allocation to bonds by an average of 7 percentage points this month compared to April, although they are still underweight overall. Cash levels, on the other hand, fell to the lowest level in almost three years.
Companies are responding
Some companies have responded to the demand for duration, with healthcare company Merck & Co. Inc. this week offered a 30-year security, the longest-term Euro corporate bond since 2021. The advantage for companies is that longer-term interest rates European debt is lower than that of short-term credits, allowing treasurers to lock in lower financing costs.
“Companies are taking advantage of the low credit spreads in the market and locking in that risk premium for their loans,” said Luca Bottiglione, head of European credit research at Zurich Insurance Group AG.
The deal with Merck helped push the average maturity of corporate bonds issued this month in the region’s government syndicated debt market to about 7.6 years – the longest since October 2021, according to data compiled by Bloomberg. The data tracks sales in euros, pounds and dollars in the region and excludes perpetual and hybrid notes.
“Companies could find a sweet spot in the markets right now,” said Althea Spinozzi, head of fixed income research at Saxo Bank AS. “They can lock in the lowest yields on the yield curve, while a significant number of investors, eager to speculate on an aggressive rate-cutting cycle, are willing to extend the duration.”
Click here to listen to a podcast about how TCW expects private debt “accidents” as stress mounts.
Weekly overview
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It’s once again turning into a seller’s market in leveraged finance, with all the consequences that entails, including a rebound in asset sales on the horizon and investors so willing that risk management becomes less of a priority.
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Buying debt sold by the lowest rated countries deters most investors. However, emerging market desks around the world call this type of risky bet “special situations” – and its popularity is growing.
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The rise of electronic trading and the growing popularity of portfolio trading have had an unintended consequence for the U.S. corporate bond market: making private credit even more attractive.
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Demand for bonds from collateralized loan obligations is helping Europe’s riskiest companies book early gains from interest rate cuts expected next month.
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Companies flooded the asset-backed securities market with offers this week, selling the most bonds this year as they sought to borrow before inflation reports added uncertainty to markets.
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Citizens Financial Group Inc. wants to raise capital with preferred shares that were previously out of favor and are now making a comeback among US regional banks.
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Agile Group Holdings Ltd., a Chinese developer of villa apartments and high-rise homes, filed for bankruptcy for the first time on publicly issued dollar bonds, underscoring its ongoing distress amid the country’s unprecedented real estate crisis.
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Merck & Co. Inc released Europe’s longest-dated corporate bonds in the common currency since 2021, in what could soon become a rare opportunity for investors to grab healthy returns before central banks finally start cutting rates.
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McDonald’s Corp. sold Canadian dollar bonds for the first time since 2017, joining a string of U.S. companies that have borrowed from the market to diversify their currency exposure.
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Ferrari NV cut financing costs in a rare bond offering by the luxury car maker.
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Blackstone Inc. and Goldman Sachs Asset Management are providing the bulk of a roughly $900 million direct loan to Depot Connect International as it refinances higher-priced private debt.
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Peloton Interactive Inc. has JPMorgan Chase & Co. hired to raise approximately $850 million through a new loan sale that will refinance existing debt.
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Banks including Barclays Plc, Deutsche Bank AG and UniCredit SpA are lining up more than €800 million ($870 million) in debt financing to back TDR Capital’s bid for Italian discount retailer Acqua & Sapone.
En route
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Fortress Investment Group has hired former Goldman Sachs Group Inc. executive Michel Dimitri. Dimitri will focus on private credit and report to Andy Frank, who leads global sponsorship finance.
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Apollo Global Management has appointed Chris Adair as managing director and fixed income specialist. Adair joins from SLC Management, where he was senior managing director and head of strategic partnerships.
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Brinley Partners, a private lending firm with more than $4 billion in assets under management, hired Rex Chung, most recently a partner at Hunter Point Capital.
–With assistance from Brian Smith, Cecile Gutscher, James Crombie and Helene Durand.
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