The lot of a bond fund manager is a tough one.
Asset buying by global central banks is blamed for pressing bond yields to historic lows, while leaving prices so lofty that investors stand to gain very little for the potential risk of losses. It’s little wonder that banks like Bank of America Merrill Lynch are telling investors to sock their cash into high-yield corporate bonds, which some see as vulnerable to a correction.
Read: High-yield bond funds see 3rd largest weekly outflows on record
As investors scrambled for yield, the supply of bonds yielding 4% or more has shrunk by $25 trillion since late 2008, said Martin Barnaby, head of European credit strategy at Bank of America Merrill Lynch. Those fixed-income assets included corporate bonds, securitized assets and bank loans.
This segment of the bond market amounted to $28 trillion in December 2008, but now stands at $3 trillion, with the majority of issuers handing out 4%or-better yields dominated by the corporate credit market (see charts below).
In response, foreign investors have rotated into higher-yielding U.S. corporate bonds from their usual allocations in Treasurys and mortgage-backed securities backed by Fannie Mae and Freddie Mac, according to the International Monetary Fund’s October Financial Stability Report.
That’s not to say the overall fixed-income market is shrinking. The Bloomberg Barclays Global Aggregate Bond index, which tracks the universe of debt with investment-grade status, has increased from about $19.5 trillion in 2007 to $45.9 trillion in Feb. 2017.
Rather the pickings for money managers looking for yield have become slimmer with every year.
“Until central banks become a lot more hawkish with their commentary, the need for quality yield is unlikely to dissipate,” said Barnaby.
See: Greenspan stresses ‘ominous’ worries about bond bubble