J.P. Morgan Asset, PIMCO sweet on company debt as Treasuries lag

J.P. Morgan Asset Management says U.S. corporate bonds are attractive and Japanese investors are gobbling them up. The PIMCO Total Return Fund is doubling the amount it’s allowed to invest in junk debt.

Corporate securities are trouncing Treasuries in 2016 as investors seek higher yields than those available outside the biggest government debt markets. The greater payments on the securities will also serve as a cushion if the Federal Reserve raises interest rates. Reports due Tuesday on consumer prices, industrial production and housing starts will guide policy makers before their next meeting June 14-15.

Japanese investors are snapping up U.S. corporate bonds as central bank stimulus in the Asian nation pushed benchmark yields to less than zero, said Bob Michele, New York-based chief investment officer at J.P. Morgan Asset, which has $1.7 trillion under management. Investors outside the U.S. purchased a net $25.3 billion of company debt in the nation in March, a seven-year high, based on the most recent data.

“What we’re seeing is a ratcheting up of buying of investment-grade corporates in the U.S., and we even have some very large institutions looking at U.S. high yield,” Mr. Michele said. U.S. company debt "looks great" versus Japanese bonds and their negative yields, he said Monday on Bloomberg Television.

Here are the average yields and 2016 returns for the U.S. Treasury, investment-grade and high-yield debt markets, based on the Bloomberg World Bond Indexes:

Benchmark Treasuries were little changed Tuesday, with the 10-year note yield at 1.76% as of 6:16 a.m. New York time, according to Bloomberg Bond Trader data. The price of the 1.625% security due in May 2026 was 98 3/4.

Pacific Investment Management Co.’s $87.1 billion Total Return Fund will be able to hold as much as 20% of its assets in high-yield securities effective June 13, up from 10% now, according to a filing Pimco made Friday. Junk bonds are high-yield, high-risk debt securities that are rated below BBB- by S&P Global Ratings and Baa3 by Moody’s Investors Service.

U.S. 10-year note yields probably won’t go any lower than the 1.70% they reached last week, said Soniya Chen, a government bond analyst in Taipei at Hontai Life Insurance Co., which has $6.1 billion in assets. The company bought emerging-market bonds Friday, she said, the same day the Treasury yield bottomed.

“The Fed will raise rates slowly,” Ms. Chen said. "That is good for the EM market” because it gives economies room to grow, she said. Treasury yields are too low for Hontai, she said.

Investors see the probability of a Fed rate increase this year at 56%, futures contracts indicate. The 10-year benchmark will climb to 2.2% by Dec. 31, based on a Bloomberg survey of economists with the most recent forecasts given the heaviest weightings.