Midday Commentary: High-grade bonds unchanged; mutual funds hold higher share of market

By Cristal Cody

Tupelo, Miss., Sept. 27 - Activity in the high-grade market was light early Friday with bonds mostly unchanged in the morning session, according to informed sources.

"Despite the intraweek volatility, both IG and HY credit spreads are ending the week similar to where they started," RBC Capital Markets, LLC analysts said in a morning note. "The lack of spread widening may reflect continued investor demand and support for additional primary issuance."

The Markit CDX North American Investment Grade series 21 index ended Thursday flat at a spread of 80 basis points.

An investment-grade bonds sell-off over the summer caused some concerns of a great rotation out of credit, but "we have not seen evidence of meaningful shifts in ownership of the asset class," Jeffrey Meli, an analyst with Barclays, said in a note on Friday. "Mutual funds now hold a slightly higher share of the market, as a result of strong growth in AUM [assets under management], while insurance company and pension funds' share of the market decreased slightly."

Although fixed-income mutual funds had some of their largest outflows on record during the early summer sell-off, "flows into funds with investment-grade corporate holdings are still significantly positive for the year," Meli said.

Insurance and pension investment-grade bond holdings declined, but that probably will not last, according to Barclays.

"We believe the almost 100 bp increase in investment-grade yields since early May is likely to lead to a pickup in demand from insurance companies and pension funds," Meli said.

Even after the May-July outflows, year-to-date inflows are more than $37 billion and near the 2011 inflows for the same period, he said.

Life insurance companies now hold a slightly lower percentage of the market, but remain the "largest and most stable buyer" of investment-grade bonds, according to Barclays.

"We believe that the recent backup in Treasury yields is likely to have led to additional insurance buying, which has not yet been reflected in the data for the latest reporting period, and that further increases in rates could reinforce this trend," Meli said. "As part of the same trend, pension funds' shift from equities to fixed income appears to have ceased. However, similar to insurance companies, we believe pension funds may increase their buying of the asset class if Treasury yields continue to increase."

Banks' allocation to investment-grade corporate debt is mostly unchanged from a year ago, according to Barclays.

"Most investment-grade corporate bond assets within banks - approximately $225 billion - are reported as available-for-sale or held-to-maturity," Meli said.

Hedge funds are estimated to now hold a slightly larger portion of the high-grade corporate bond market from a year ago as a result of the growth in assets under management, he said.

"While the high-yield market is likely to have been a bigger beneficiary of this increase in AUM, certain parts of the investment-grade market, such as subordinated financials, wider-spread or crossover credits, and event-risk names, are likely to have received some of the new hedge fund money as well," Meli said.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.