The Federal Reserve’s dive into corporate debt on Tuesday aligns the U.S. central bank with money managers around the world pivoting toward America Inc.’s bonds and away from its shares.
Exchange-traded funds investing in credit saw $2.4 billions of inflows in the past week, compared to outflows for equities, data compiled by Bloomberg show.
Funds targeting American stocks posted $9.3 billion of outflows in the period ending May 6, the most in six weeks, according to a Bank of America note citing EPFR Global data. The six-week inflow for high-yield bonds hit a record $32 billion.
It’s the “follow the Fed” mantra in action as investors fresh from the first-quarter turmoil seek safety higher up in the capital structure.
“We decided to reduce our global equity exposure in favor of global investment grade corporate bonds,” said Greg Perdon, chief investment officer of Arbuthnot Latham & Co Ltd. “We have preference for bonds that are going to benefit from central bank intervention. Investment grades might not have much of an upside, but they have a floor.”
The Fed facility beginning today is designed to purchase eligible credit ETFs -- likely including an unprecedented bid for high-yield securities -- as part of its emergency stimulus program to combat the coronavirus fallout.
Just the announcement of those measures was enough to help trigger the rebound in risk assets. The S&P 500 is up almost 30% from its March low. The spread on investment-grade U.S. bonds has recovered to around 210 basis points from more than 370 basis points.
And on the first day of central bank buying, the largest corporate bond ETF surged the most in a month.
Even without Fed support, corporate debt has good form when it comes to recovering from a sell-off.
UBS Wealth Management reckons there have been 42 months since 1987 when high-yield spreads blew out past 800 basis points, as they did in March. The subsequent 12-month returns were positive on all but one occasion, with a median return of 24.5%.