For the first time on record, investors are demanding a smaller premium to own U.S. corporate bonds than global company debt.I did not think corporate bond buyers were compensated for the risk in October, and I still do not feel that way now.
Bondholders require 166 basis points more yield to hold U.S. investment-grade company debt instead of Treasuries, compared with an average 169 basis-point spread worldwide, according to Bank of America Merrill Lynch data. At the height of the credit crisis in December 2008, companies had the disadvantage of having to pay about 150 basis points more to lure U.S. investors to their bonds than borrowers seeking buyers elsewhere in the world.
�With the strong stimulus package and QE2, I expect 2011 to be a relatively strong economy and corporate bonds tend to do pretty well in that environment,� Brynjolfsson, who oversees $362 million, said Dec. 3 on Bloomberg Television. �Even if corporate yields rise a little bit it�s likely spreads tighten, which corporate bond managers like to see.�
In October, people were plowing into IBM and Walmart 3-year bonds at .7% because treasuries were yielding less. 3-year treasuries are now 1%. This is the silliness of buying relative value when there is no value at all.
US corporate bonds may be a relative value, but who should care? Is there any value in them? I think not but those speaking their book argue otherwise.
By the way, I am often presented with the argument that IBM is less likely to default than the US government. This is my response: If the US defaults (which I highly doubt), you sure will not want to be in any US denominated bonds.
All of this relative bargain positioning, including PIMCO's love affair with Municipal bonds, is economic madness.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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