Everything’s Expensive. There’s Nowhere to Hide: Credit Weekly

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(Bloomberg) — Credit market bargain shoppers are having the hardest time finding deals in at least a generation.

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A relentless rally has left valuations stretched on just about all high-grade company debt globally. The difference between spreads on individual bonds and the average of the index is the lowest on record, according to data compiled by Bloomberg going back to 2009.

Risk premiums are low for top-notch and weaker companies alike. In junk bonds the spread variability, or dispersion, is at its lowest since right before the onset of the Covid-19 pandemic.

Investors looking to juice their returns now typically have to take on a lot more risk for not much extra yield. When a client asked Insight Investment’s April LaRusse for ways to boost spreads without materially amplifying potential losses in recent weeks, she didn’t have an immediate answer.

“It’s certainly not easy to find ways to get more yield without introducing different risk,” said the head of investment specialists in an interview. “It’s pretty tricky. When you get tight spreads, you get a lot less dispersion.”

The growth of both credit index and fixed-maturity funds probably plays a role here: investors are increasingly just buying most of the market, flattening out the differences in bonds’ yields. The lack of variability makes it difficult to find bargains.

Massive inflows have swamped corporate bond funds recently as investors chase securities offering higher yields than Treasuries, even if spreads are relatively tight. Insurance companies have also been packaging company debt into annuities to sell to the growing number of US retirees.

Meanwhile, the average risk premium for global high-grade bonds stood at 82 basis points on Thursday, close to its tightest level since before the global financial crisis, data compiled by Bloomberg show. It’s not much different in the junk-rated market, where spreads are roughly a quarter of a percentage point away from the post-crisis lows set in February.

There are reasons for investors to be cautious about amping up risk to boost returns. Job growth in the US cooled sharply in the past three months. And concerns about deteriorating economic activity in the US are starting to take over tariff-induced inflation as the biggest peril in the market, according to the latest purchasing managers index surveys.

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