Money managers are increasingly favoring longer-term corporate bonds, betting that the Federal Reserve is getting inflation under control and could pause hiking rates further.
(Bloomberg) — Money managers are increasingly favoring longer-term corporate bonds, betting that the Federal Reserve is getting inflation under control and could pause hiking rates further.
About 26% of US investment-grade corporate bond sales this month have been securities maturing in 30 or more years, compared with just 4% in April and 15% for all of last year. About a third of Pfizer Inc.’s $31 billion bond sale this week was 30 years and above.
Demand is broadly coming from investors looking to lock in higher coupon payments, after fearing Federal Reserve rates hikes for months. Apple Inc. sold $1.25 billion of 30-year bonds on May 8 at a yield of around 4.88%. When it sold 30-year securities in July 2021, they yielded about 2.71%.
The macro outlook is cloudy, but on Friday Fed Chair Jerome Powell signaled he is open to pausing interest-rate increases. Inflation seems to be moderating with a report last week showing that the consumer price index rose by 4.9% in April, and a measure of services inflation signaling an even more pronounced slowdown.
“Many investors like long duration exposure because of the view that all-in yields are attractive, and that the Fed is done hiking so long-end rates won’t rise further,” said Vishwas Patkar, head of investment-grade credit strategy at Morgan Stanley.
Fed funds futures markets are pricing in Federal Reserve rate cuts later this year. There’s a 65% chance of a recession over the next 12 months, according to Bloomberg survey of economists published Friday with 41 respondents. If there is a recession, long-term yields will fall and longer-dated securities can perform well, Morgan Stanley’s Patkar said.
For much of the last year, money managers sought shorter term debt that would perform relatively better when rates were rising. Debt maturing in 10 or more years lost more than 25% of value last year, compared with declines of more than 9% for more intermediate debt, according to data compiled by Bloomberg.
But with the Federal Reserve appearing to be closer to the end of its tightening campaign, money managers are more willing to buy longer-term securities. When Texas Instruments sold $1.6 billion of bonds last week, three-quarters of the sale was 40-year debt. When it sold bonds in March, the longest-term portion was 30 years, and accounted for less than half of the $1.4 billion offering. Meta Platforms Inc. also included bonds due in at least 30 years in its bond sale this month.
“Investors are looking for high-quality, liquid names when extending further out the credit curve,” said Rajeev Sharma, managing director of fixed income at Key Private Bank, in an interview. “That’s why when you see some of these big, high quality issuers come out with these jumbo deals they get a really nice reception from the investor community.”
Spokespeople for Pfizer, Apple, and Texas Instruments weren’t immediately available for comment.
While high-grade corporate bond spreads have broadly widened this year, longer-term securities have performed relatively better. Risk premiums on bonds maturing in 10 or more years have widened just 0.09 percentage point, or 9 basis points this year through Thursday, compared with 18 basis points for intermediate notes.
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