The bond market just set a distressing record for income-oriented investors.
According to Lotfi Karoui and the credit strategy team at Goldman Sachs, yields for corporate bond have not been this low in nearly 6 decades.
After noting that the recent Brexit vote had investors searching for safe assets instead of yield, Karoui said that it was simply a short-term blip.
“This ‘pause’ in the search for yield coincided with rising expectations of further monetary easing and a sharp rally in global rate markets that pushed the Moody’s Baa corporate bond index yield to its lowest level since the August 1956,” wrote Karoui in a note to clients Thursday.
The Moody’s index aggregates the average yield for bonds with its Baa rating, it’s middle-of-the-road rating, and it currently stands at just 4.21%.
For comparison, the Moody’s Aaa index (its highest grade) yield is at 3.5%, also at its lowest since 1956. The Bank of America Merrill Lynch High Yield Bond index is at 7.08% as of Thursday.
Remember, as the price of a bond goes up, it’s yield falls. So as more and more people are flocking to lower-graded corporate bonds in order to get more yield, the price will increase with the demand and the yield will sink. Thus, to get the same yield as investors expect, they have to go further down the quality ladder which exacerbates the issue.
According to Karoui, these investors on the “search for yield” will continue to be a huge part of the market.
“Combined with the recent decline in macro volatility and the growing comfort with the notion that Brexit will likely be a local shock, we think this will likely gradually bring the search for yield theme back into focus,” he wrote in the note.
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