FILE PHOTO: A bronze seal for the Department of the Treasury is shown at the U.S. Treasury building in Washington, U.S., January 20, 2023. REUTERS/Kevin Lamarque/File Photo
WASHINGTON: Investors are showing signs of pulling money out of government bonds and plowing it into the United States and European company debt.
If the moves persist, money managers could be shifting what for decades has been market orthodoxy: that nothing is safer than buying US government debt.
But as US fiscal deficits climb, hurt by tax cuts and rising interest costs, the government may look to borrow more, and company debt may be the safer option.
In June, money managers pulled US$3.9bil from Treasuries, while adding US$10bil to European and US investment-grade corporate debt, according to EPFR Global data.
In July, investors have added another US$13bil to US high-grade corporates, the largest net client purchasing in data going back to 2015, according to a separate note from strategists at Barclays last Friday.
Michaël Nizard, a portfolio manager at Edmond de Rothschild Asset Management, started making the switch from government into corporate debt at the end of last year and is holding on to the position.
And in a note in the latest week, BlackRock Inc strategists wrote, “Credit has become a clear choice for quality.”
To the extent this shift is happening, it’s a slow change. The United States doesn’t have foreign currency debt, and can print more dollars as it needs to.
When money managers were alarmed about tariff wars in April, US Treasuries still performed better than corporate bonds, even if prices for both sectors broadly fell. And foreign demand for Treasuries has remained resilient, with holdings climbing in May.
But tightening corporate bond spreads in recent months may be a function of government debt looking relatively weaker now. The US lost its last AAA grade in May, when Moody’s Ratings cut it to AA1.
At the same time, corporate profits remain relatively strong, and although there are reasons for caution, high-grade companies are generally generating enough earnings to easily pay their interest now.
More US companies are topping earnings estimates this reporting season than the same period last year. Valuations for company debt have been high recently, reflecting investor demand for the debt.
High-grade US corporate spreads have averaged below 0.8 percentage point, or 80 basis points, in July through last Thursday.
That’s far below the mean for the decade of about 120 basis points, according to Bloomberg index data.
Spreads for euro-denominated high-grade corporates have averaged about 85 basis points in July, compared with about 123 basis points for the decade.
But to many market observers, the world appears to be shifting, and it makes sense to hold more corporate debt now.
“What we’ve seen on the government fiscal side is not great news,” said Jason Simpson, a senior fixed income SPDR ETF strategist at State Street Investment Management. “Corporates seem to be chugging along nicely.” — Bloomberg
