Bloomberg News

High-Grade Debt Loss Will Shrink on Demand, Bank of America Says

March 15, 2012

The worst loss for U.S. investment- grade corporate bonds since November is likely to shrink as rising interest rates spur growing demand for the securities, according to Bank of America Merrill Lynch.

The debt has lost 1.25 percent this month as 10-year Treasury yields jumped to 2.28 percent, narrowing relative yields to 194 basis points, the least since August 2011, according to Bank of America Merrill Lynch index data. Losses for the month will be reduced as Treasury yields stop rising and spreads tighten further, Bank of America Merrill Lynch strategist Hans Mikkelsen said.

“As higher interest rates make corporate bonds more attractive for yield-sensitive investors at current still ultra- low levels, subsequent spread tightening - assuming no further increase in interest rates and 15 basis points further spread tightening from today - would lead to March total-return losses of only about 15 basis points,” he wrote in a report today.

Investment-grade corporate bonds are losing this month as Treasury yields, which the securities price off of, have surged on better-than-expected economic data, reducing the allure of safer securities. While that might prompt some retail investors to sell, it’s more likely that demand for the bonds will rise because of higher yields, JPMorgan Chase & Co. analysts said in a note today.

Yields on investment-grade debt rose to 3.6 percent yesterday from 3.4 percent on March 2, which was the lowest on record, Bank of America Merrill Lynch index data show. That’s still below the 3.93 percent reached on Jan. 4, the highest level this year.

Since December 1999, there have been 50 months with total return losses, according to the note. Fund outflows occurred either during one of those months or in the subsequent month only 12 times, Mikkelsen wrote.

“While we may still see some daily outflows going forward, we are still unlikely in our view to see monthly outflows unless interest rates back up much further,” he wrote.

To contact the reporter on this story: Sapna Maheshwari in New York at sapnam@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net


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