Investment-grade credit is having its moment in the spotlight, thanks to a potent combination of central bank action, a search for yield and the recognition that conservatism in investment is key.
Sources at money management firms and consultants said there has been a rotation out of government bonds and inflows into investment grade, with the U.S. the shining light when it comes to opportunities.
“There is a prestige right now for the market around high quality — it is investment grade's time,” said Andreas Michalitsianos, portfolio manager in London at J.P. Morgan Asset Management. “Investment grade, in the U.S., Europe, and now in the U.K., is caught in the crosshairs between being in the central bank toolkit and being a risky asset.”
The case for investment grade was bolstered when the Bank of England's monetary policy committee announced Aug. 4 that it would extend its measures to stimulate the U.K. economy in part by buying up to £10 billion ($13.1 billion) of corporate bonds.
“It is a golden rule ... that you want to be buying what central banks are buying,” said Tapan Datta, head of asset allocation in London at Aon Hewitt. “And they are buying investment grade.”
The fact that corporate bond buying is happening in Europe and the U.K. is not important; globally investment grade is strong, he said.
Central banks in the U.K. and Europe also are helping support the U.S. credit market, added Gregory Venizelos, senior credit strategist at AXA Investment Managers in London. “Investment grade was not exactly the favorite child in terms of investor preference at the beginning of the year, but things have changed. A low zero- and negative-rate backdrop globally, plus activity by the Bank of England and (European Central Bank), has boosted the prospects for investment grade.”
Added Mr. Michalitsianos: “I think we are seeing structural flows. The Fed is not buying corporate bonds, Bank of Japan is not buying U.S. corporate bonds — but this rebalancing effect (of) bringing cash rates into negative territory in Japan and Europe has caused, whether it is a coincidence or not, a surge in demand for U.S. investment grade.”
Figures from data provider EPFR Global tell the story. For 2016 through Aug. 8, investment-grade funds have attracted $97.8 billion, compared with net inflows of $55.1 billion for all of 2015. That marks a significant turnaround compared with 2013, when net outflows totaled $88.7 billion for the year.
“It is a bit of feast or famine for investment grade in the sense that we are seeing significant inflows as part of a search for yield and income,” said David Riley, head of credit strategy at BlueBay Asset Management LLP in London. “There has been a rotation out of government bond funds into credit, in particular investment grade, and we are also seeing more broadly outflows in Europe from equity funds and into fixed-income funds — certainly into credit, and investment grade being the primary beneficiary of that.” Overlay those elements with central bank action, and there has been a rally in credit spreads, he said.
Sources placed the spread pickup for investment grade around 200 basis points. U.S. investment-grade opportunity shines particularly bright when it comes to yield, they noted. Other managers pointed out opportunities in Asian investment-grade credit.