The bonds of companies in the S&P 500 index enjoyed a good run following the victorious âleaveâ vote in the U.K.âs referendum on EU membership â even as their stocks got crushed.
The strong performance baffled analysts at first because corporate bonds are considered so-called risk assets, if not typically as risky as their stock brethren. Demand for corporate bonds over government-issued debt, for instance, tends to rise when risk appetite spikes and fall when markets are in panic mode; thatâs typically true of stocks, too.
But even as the S&P 500
Â plunged following the Brexit vote â in two days of global carnage that wiped out a record $3.01 trillion from global equity markets â the S&P 500 Bond Index rallied.
In the bond market, yield is always relative.
âDemand for quality bonds with incremental yields over Treasurys has risen to such an extent that it has outstripped supply,â said J.R. Rieger, managing director of fixed income indices at S&P Dow Jones Indices.
With $10.7 trillion in government bonds across the world sporting negative yields, investors looking for decent income have seen their options dwindle. That has created a kind of âyield blindness,â Rieger said, that has investors scooping up bonds of U.S. corporations with good credit quality as an alternative to record-low sovereign bonds.
On Wednesday, the S&P 500 was up 1.3% on a year-to-date basis and down 1.3% for the month of June, while the S&P 500 Bond Index, which is designed to be a corporate-bond counterpart to the S&P 500, was up 7.4% year to date and up 2% in June. The bond index offers a 2.9% yield, nearly 1.5 percentage point above the 10-year Treasury
Meanwhile, the S&P 500 Investment Grade Corporate Bond Index, which includes bonds with higher credit quality, was up 7.2% year to date and up 2.1% in June.
Even financial companies, which bore the brunt of the beating on the stock side, are posting a strong performance on the bond side. The financial sector of the S&P 500 is down 5.9% year to date and down 5.2% in June. But the S&P 500 Financials Corporate Bond Index is up 5% year to date and up 1.4% in the month of June.
âA diversified basket of investment-grade corporate bonds will yield more and probably give you more or equal [credit] quality to government bonds,â Rieger said.
Indeed, the notion of the âqualityâ premium in sovereign debt was challenged again on Monday after the U.K. was stripped of its AAA credit rating by S&P Global Ratings, even as the U.K. government bonds rallied strongly, pushing the 10-year yield
below 1% for the first time in history. Â
As government bonds rallied across the world, one strategy to take advantage of âtoo much panicâ in global markets has been to sell Treasurys and âredeploy cash to higher-yielding investment-grade corporate bonds,â said Bryce Doty, senior fixed-income manager at Sit Investment Associates.
Foreign investors appear to be implementing this strategy, particularly in Europe and Japan, Bank of America Merrill Lynch credit strategists said in a report released Monday.
Even though the absolute level of U.S. corporate yields is coming down, itâs still high relative to European yields, the report noted, particularly after the European Central Bank added corporate bonds to its purchases earlier this month.
âMoreover, on the Japanese side U.S. corporate bonds are now more than ever the only game in town,â the Bank of America report said.
âJapanese corporate yields are now at 0.13% and the situation is not much better in 30-year [Japanese government bonds] yielding 0.15%. However, the yield on a fully currency-hedged basis for a Japanese investor buying a 10-year U.S .senior bank bond is 0.80%, or five to six times as high,â as the following chart shows.