Money manager Bonnie Baha can’t think of a worse time to be buying the bonds of America’s blue-chip companies.
They’re yielding about the least ever, with the average dipping under 2.9 percent this month. Prices of the debt are more sensitive to interest-rate increases than at any time in the past 20 years, just as the Federal Reserve considers raising them. And now the fortress balance sheets that companies built in response to the 2008 credit crisis are being eroded, with executives increasingly eager to borrow cheaply to satisfy shareholders starved of revenue growth in a sluggish economy.
“In my 30-year career, it’s one of the most unattractive risk-return propositions that I’ve seen,” said Baha, who helps manage $73 billion as the director of global developed credit at Jeffrey Gundlach’s DoubleLine Capital in Los Angeles.
Those warning signs help explain why BlackRock Inc.’s Rick Rieder is buying less of the debt and DoubleLine founder Gundlach and Baha have been paring holdings for the past 18 months in their core fixed-income fund. The securities have gained just 0.56 percent more than Treasuries this year. That’s after a negative 0.04 percent in 2014, meaning that the only gains for the year came from declining interest rates.
“There isn’t a lot of value” in investment-grade corporates, Rieder, who oversees more than $700 billion as BlackRock’s chief investment officer for fixed-income, said Thursday in an interview. “We have a higher level of interest- rate risk than we’ve ever had before and people have to be sensitive to it.”
Gundlach said in an investor webcast on Tuesday that the firm is largely avoiding the debt and instead likes municipal bonds because of their high yields relative to other parts of the fixed-income market.
After more than six years of short-term interest rates near zero and a net $1.2 trillion of investor cash placed into bond funds, the investment-grade corporate bond market has ballooned to $4.8 trillion, according to a Bank of America Merrill Lynch index. A measure of the debt’s sensitivity to interest-rate changes, expressed in years, reached a record 7.16 this month, from 5.9 at the start of 2009.
Average yields on U.S. corporate bonds have fallen to 2.94 percent, below the 10-year average of 4.68 percent.