Investors dare to dive back into bonds – The Wall Street Journal

Some target corporate bonds ranging from blue chip names like AT&T Inc..

and Ford Motor Co..

to undesirable satellite telecommunications operator Dish Network Corp.

Others are buying bonds backed by real estate mortgages or larger real estate loans to mall and factory operators.

“We finally flipped the switch,” said Elaine Stokes, senior bond fund manager at Loomis Sayles & Co., who says she bought bonds at attractive yields from other investors forced to sell by the market conditions. “That’s what we expected.”

Stocks and bonds saw a rare simultaneous fall in what has been the worst-performing debt market in 40 years. Portfolio managers are now seeing pockets of opportunity as they search for investments that will best withstand future volatility.

In upcoming sessions, investors will study the minutes of recent Federal Reserve talks for further confirmation that officials plan to raise short-term interest rates by half a percentage point at upcoming policy meetings. the central bank. They will also analyze earnings from pandemic favorite Zoom Video Communications Inc..

with chipmaker Nvidia Corp.

and retailers Nordstrom Inc.

and Macy’s Inc..

Bob Miller, co-manager of BlackRock Inc.’s

$44 billion strategic income opportunity fund, like AT&T investment grade bonds, which have fallen 30% this year to prices as low as 78 cents on the dollar and yields of up to 5% . That’s close to their peak returns in March 2020, when the global pandemic rocked financial markets, according to data from MarketAxess. Bond yields rise when prices fall.

Miller expects interest rates to continue to rise globally in the coming years, which would lead to an overall decline in bond markets. AT&T’s debt is still attractive as the company plans to buy back existing bonds it took on in part to fund its 5G network expansion, he said.

Investors historically held bonds as ballast against more volatile equities, but that momentum broke this year when debt and equity markets fell together in anticipation of the Fed’s move to interest rate hikes. more aggressive interest. Higher interest rates have made existing low-coupon bonds less attractive, driving down their prices. Higher borrowing costs prompted equity investors to recalculate exorbitant prices for stocks they had purchased, often using credit to boost returns.

After the recent downturn, bonds look closer to bottoming than stocks, and “fixed income’s ability to act as an equity buffer has increased,” said Lawrence Gillum, fixed income strategist at LPL Financial, in a report released Tuesday.

The yield on a corporate bond index has risen from 2.3% at the end of December to 4.4%, meaning the index is now as far above the median yield as it was below end of 2021, according to data from Bloomberg. Inc. The extra yield, or spread, that investors demand to hold them over U.S. Treasuries was 4.44% above the median recently, up from 32% below the median at the start of the year.

The risk of buying now is that high inflation could persist, forcing the Fed to push interest rates beyond current expectations. There’s a roughly 40% chance that such a scenario would push the U.S. economy into a deep recession and that “anticipating the recession will cause credit spreads to widen further,” analysts at Bank of America Corp said. in a report this month.

Investors withdrew about $3 billion from junk bond mutual funds and exchange-traded funds this week, but outflows from investment-grade corporate bonds slowed to $300 million, versus about $7 billion the previous week, according to Bank of America. Net equity outflows edged up to $2.7 billion.

SLC Management favors commercial mortgage-backed bonds because their spreads have widened significantly, said DJ Lucey, portfolio manager at the investment firm owned by Canadian insurer Sun Life Financial Inc..

“I don’t necessarily think there’s going to be a soft landing. [of the economy] but from a pure valuation perspective, a lot of bad news is already priced in,” he said.

Commercial mortgage-backed bonds with low investment-grade credit ratings pay an average spread of 4.2 percentage points over Treasuries, about 8.4% higher than the median since 2008, according to Bloomberg data. Bonds are yielding about 7%, down from 4.9% in early January.

The market for so-called agency bonds that pool mortgages made by government-backed giants Fannie Mae and Freddie Mac has also looked attractive to some investors in recent weeks.

Fears that the Fed could sell agency bonds it holds this year pushed their average spread over Treasuries to 0.48 percentage points at the end of April, about 40% above the median since 2008 The spread has fallen back to mid-levels in recent days.

“Agency mortgages are a way to take advantage of high government yields and get an extra premium,” said Christian Stracke, global head of credit research at bond fund giant Pacific. Investment Management Co.

Others are bottom fishing for junk rated bonds that have fallen as losses have forced some holders to sell. The $3.3 billion bond issued by online used-car market Carvana Co.

attracted speculative funds after losing around 15% in a few days. About half of the bonds have changed hands since their issuance in late April and their yield has fallen from 10.25% to 13.25%, according to data from MarketAxess.

Convertible bonds, which can be exchanged for stocks, have been among the hardest hit by the fallout from the stock sell-off. These have some of the security of a bond while allowing holders to capture some of the gains if stock prices take off. Convertible debt from tech-related companies such as Wayfair Inc.

Upstart Holdings Inc..

and Lyft Inc..

has fallen about 15% to 25% in the past four weeks, while automaker Ford’s convertible bond has fallen about 13%.

“The unease has created real opportunity,” said Tracy Maitland, chief investment officer at Advent Capital Management, which manages about $10 billion in investments and sees value in the Ford bond.

Convertible bonds generally yield less than their conventional counterparts to account for their embedded stock options. That momentum briefly reversed this month for companies with steep declines in stocks such as fintech firm Block Inc..

residential solar company Sunnova Energy International Inc.

and MicroStrategy Inc..

a software company that invests in cryptocurrency, according to the Wall Street Journal’s analysis of MarketAxess data.

Hedge fund manager Wasserstein & Co. bought convertible bonds from biodegradable plastics maker Danimer Scientific Inc.

, which has fallen about 19% in the past six weeks. The company’s claims about its products have sparked controversy, but the company’s assets far outweigh its debts, protecting bondholders, said Rajay Bagaria, Wasserstein’s chief investment officer.

For now, Wasserstein is “nibbling” opportunities, Bagaria said. The fund keeps around a quarter of its assets in cash or cash equivalents in anticipation of further market disruptions.

Write to Matt Wirz at [email protected]