Neil Sun, Portfolio Manager on the BlueBay U.S. Fixed Income team, discusses how demand for Investment Grade credit has remained strong despite spreads versus treasuries remaining small.
Watch time: 3 minutes, 26 seconds
View transcript
Welcome to The Weekly Fix. My name is Neil Sun.
Today, Investment Grade bonds are seeing strong demand, but it’s not because spreads are wide. In fact, index spreads have returned to their tighter range following the rally in May. So, what’s driving the chase for bonds? The answer lies in yield buyers, sector dispersion, and a market that values all-in yield over macro headlines.
Let’s start with fund flows. After a few weeks of outflows in April, US investment-grade fund flows have turned positive. Just last week alone, they pulled in nearly $4bn, extending a multi-week streak of inflows. Typically, investors chase total returns. But this time, buyers are piling in because of the attractive yield.
At around mid-5% for many recent new issues, even with tighter spreads, the yield level is compelling for pensions, insurance, and global allocators still sitting on cash. If you look further out the curve, the hunt for yield becomes more pronounced. Long-dated IG bonds are offering yields north of 6% - a level that has been drawing strong interest from institutional buyers. Add to that a noticeable lack of 30-year bond supply so far this year, and you’ve got a classic case of high demand meeting low availability. That scarcity is only adding fuel to the bid for long bonds.
Even with spreads grinding tighter overall, sector dispersion is making a comeback:
Yankee banks – US dollar bonds issued by foreign banks – have rallied sharply, as investors seek wider spreads and diversification from US assets. On the negative side, energy names underperformed, weighed down by growth concerns and lower energy prices. Utility issuers have also lagged, pressured by heavy new issuance and ongoing wildfire concerns.
So what does it mean for investors? In short, it’s a great time to be selective and stay active. Even if the overall spread level is tight, relative value is very much alive. Smart money isn’t just reaching for yield – it’s targeting sectors with solid fundamentals and capitalizing on price dislocations.
Here’s the big picture: demand for IG corporate bonds remains strong-to-quite strong with yield-focused buyers anchoring the market. Sector dispersion is creating opportunities for active investing strategies. We see additional tightening potential for long-duration bonds. We also find more value in sectors like Utilities, where recent underperformance – combined with their defensive profile - presents a potential buying opportunity.
We continue to stay nimble in this uncertain risk environment, and we stand ready to capture opportunities through both sector allocation and security selection.
Thank you again for watching.
Key points
Investment Grade bonds are seeing strong demand, driven by in yield buyers, sector dispersion, and a market that values all-in yield over macro headlines.
Even with relatively tight spreads, attractive yields are compelling for pensions, insurance, and global allocators still sitting on cash.
Sector dispersion is making a comeback, making it a great time to be selective and stay active.
We are staying nimble in this uncertain risk environment, standing ready to capture opportunities through both sector allocation and security selection.