The high price of low rates

Jul 28, 2020 | Jay Zhang


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A confluence of several factors has pushed the average yield on U.S. investment-grade corporate bonds below 2% for the first time, while premiums for those bonds have risen to previously unseen heights. But despite market rallies, we believe pockets

RBC DS-DOVE

U.S. fixed income markets had another milestone week as the average yield on investment-grade corporate bonds slipped below 2% for the first time on record, while the average price of a bond in the ICE BofA US Corporate Index has swelled to an also-record $1,150, a hefty premium to par values of $1,000. Bond yields and prices move inversely.


A number of factors drove the plunge, with the Fed’s ongoing corporate bond purchase program receiving much of the credit—or perhaps the blame, depending on one’s point of view—but to date the Fed has purchased just $43 billion of corporate bonds, a fraction of the $750 billion authorized size of the program. While the Fed’s backstop for the corporate bond market is a factor, it’s not the full story, in our view.


Treasury yields are back on the move lower as well, with the 10- year Treasury yield back below 0.60% for one of the first times since the market volatility of March and April, having ascended as high as 0.90% in June. At the same time, credit spreads—or the yield premium over Treasuries for credit risks—have faded to just 1.29%, also the lowest since March and largely due to the stock market rally that has reduced risk premiums and corporate credit concerns.


Additionally, personal savings rates for U.S. consumers have skyrocketed in recent months, reaching as high as 32% of disposable income in April, well above the 6.6% average since 1990, only adding to the problem of too much cash chasing too few “safe assets” despite all of the corporate and government debt issuance this year.

 

Market pulse
3 U.S. corporate earnings results better than feared
3 Strong demand for Canadian preferred share alternative
4 Agreement reached on European Recovery Fund structure
4 Hang Seng TECH Index set to launch

 

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