US Corporate Bonds Attract Investors... Yields Hit Zero for the First Time Ever

As Government Bond Yields Fall, Investors Flock to Corporate Bonds...First Time Below Inflation
Expectations of Economic Recovery Also Boost Corporate Bond Popularity
Companies Raise Funds Under Unprecedentedly Favorable Conditions

[Asia Economy Reporter Naju-seok] U.S. corporate bond yields have fallen to levels below expected inflation. This is interpreted as a result of increased demand as investors turned to corporate bonds following the COVID-19 pandemic, coupled with expectations of economic recovery. It is the first time since the corporate bond index was introduced in 2003 that corporate bond yields have fallen below the annual inflation rate.

On the 7th (local time), the Wall Street Journal (WSJ) reported that as of the 4th, the yield on U.S. investment-grade corporate bonds was 1.85%, below the expected inflation rate of 1.89%. Considering inflation and other factors, corporate bonds are being issued with a real yield around 0%. The corporate bond yields and expected inflation figures were cited from Bloomberg-Barclays data and the Federal Reserve Bank of St. Louis, respectively.

While the real yield on U.S. Treasury bonds has been below 0% for several months, this is the first time that the real yield on corporate bonds has also dropped to 0%.

WSJ pointed to the decline in U.S. Treasury yields as one reason for the corporate bond real yields falling into negative territory. As Treasury yields fell, investors chose corporate bonds as a relatively higher-yielding investment. In fact, the 10-year Treasury Inflation-Protected Securities (TIPS) yield, which is used as a benchmark for Treasury yield value, stands at -0.97%. For investors aiming to generate returns, turning to corporate bonds over Treasuries was inevitable.

Nicholas Elfner, co-head of research at Breckinridge Capital Advisors, said, "Individuals and institutions cannot afford the luxury of investing 100% in stocks," adding, "The choice is how much corporate bonds to buy compared to Treasuries, and investing in investment-grade bonds is a way to increase yields." Considering Treasury yields, corporate bonds still warrant attention, even if not to the extent of stocks.

Optimistic expectations about the economy, such as the development of COVID-19 vaccines and the U.S. government's economic stimulus measures, also contributed to the decline in corporate bond yields. As economic conditions improve, companies issuing corporate bonds are expected to fulfill their debt obligations more reliably.

As investors turned to corporate bonds, companies were able to raise funds at lower interest rates. For example, Bank of New York Mellon raised $750 million (approximately 810 billion KRW) in 3-year corporate bonds at a yield of 0.386%. According to LCD, a subsidiary of S&P Global Market Intelligence, this is the lowest ever for a 3-year bond.

Andrew Karp, head of global investment-grade capital markets at Bank of America (BoA) Securities, said, "For companies, the current interest rates are historically low, so there is a clear reason to consider raising long-term funds through corporate bonds." He added, "Next year, corporate bond issuance is expected to decrease compared to this year, as many companies have already raised funds or extended debt maturities through corporate bonds."

This content was produced with the assistance of AI translation services.