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The world’s biggest asset manager said it would ditch its wager on one of the most favored trades in Wall Street.
BlackRock argued in a Tuesday note that after racking up significant gains since the March lows in the U.S. stock market, investment-grade corporate debt had fully priced in the Federal Reserve’s support and did not offer enough yield to cushion against a rise in interest rates. With the backing of the U.S. central bank, values for these bonds are now back near pre-pandemic levels.
Investment-grade corporate bonds tend to carry longer maturities, making them vulnerable to a sudden and painful rise in government debt yields.
The average maturity of U.S. aggregate bond indexes, which comprise of solely investment-grade issuers, was just shy of six years.
BlackRock downgraded its previous overweight allocation for investment-grade corporate debt to neutral. Instead, they advocated investors raise their allocation of sub-investment grade bonds, or junk bonds, to boost their income.
Since the Fed’s interventions to stave off a credit crunch, investment-grade bond values have surged and yields have fallen.
This has compressed the credit spread, or the extra compensation investors demand for holding highly rated corporate debt, pushing it down to 1.35% as of Monday from 4.01% on March 23, close to where they traded before the COVID-19 pandemic led to widespread business lockdowns across the U.S.
Companies have also taken advantage of the easier borrowing conditions to refinance their bonds and raise enough cash to get them through the coronavirus pandemic.
See: U.S. corporate debt soars to record $10.5 trillion
Like others, BlackRock has touted the attractions of higher-rated debt on the basis that the Federal Reserve’s emergency lending programs had provided a floor for the market.
Under the Fed’s program, only investment-grade bonds are eligible for purchase, though junk-rated debt may be bought indirectly through the purchases of exchange-traded funds.
This support has powered a 7.9% year-to-date gain for the iShares iBoxx Investment Grade Corporate Bond exchange-traded fund LQD . Over the same stretch, the S&P 500 SPX rose around 4%.
BlackRock also runs the Fed’s facility for buying and selling corporate bonds and exchange-traded funds tracking the performance of corporate credit indexes.
