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Barclays Joins Goldman Sachs in Shunning Credit for Equities

March 22, 2012

Global corporate bonds won’t match the record-setting returns of the first two months of the year for the rest of 2012, Barclays Plc analysts said, joining Goldman Sachs Group Inc. (GS) in predicting equities would outperform fixed income.

Increased volatility and reduced liquidity will prevent the extra yield investors demand to hold corporates instead of government bonds from returning to historical lows, Barclays credit strategists led by Jeffrey Meli wrote in a report today. High dollar prices, in addition to low interest rates, make it difficult for spreads to compress further, according to the analysts.

“We see limited additional yield compression from this point on,” Sherif Hamid, one of the Barclays analysts who wrote the report, said in a telephone interview from London. “We view equities as representing a more attractive risk-reward opportunity than credit, particularly investment-grade credit.”

Corporate bond spreads in the U.S., which have declined by 74 basis points since the start of the year to 269 basis points yesterday, are still above the 130 basis points reached in February 2007, according to Bank of America Merrill Lynch index data.

‘Long Good Buy’

“We think it’s time to say a ‘long good bye’ to bonds, and embrace the ‘long good buy’ for equities as we expect them to embark on an upward trend over the next few years,” Goldman Sachs’s Peter Oppenheimer and Mattheiu Walterspiler wrote in a research note yesterday.

Global corporate debt returned 3.8 percent in January and February, the Bank of America Merrill Lynch index data show. It has lost 0.3 percent this month.

Low interest rates could dissuade total-return investors, the Barclays analysts wrote. The Federal Reserve has taken extraordinary measures since the September 2008 failure of Lehman Brothers Holdings Inc. to lower borrowing costs, which helped push the 10-year Treasury yield to 1.72 percent Sept. 22, 2011, the lowest since at least 1962.

The Barclays analysts calculate that investment-grade credit in the U.S. and in Europe can only absorb small increases in benchmark yields before total returns turn negative. Yields on investment-grade bonds in the U.S. reached a record low of 3.4 percent on March 2 from as high as 4.16 percent in October, Bank of America Merrill Lynch index data show.

Bond dealers reduced holdings of corporate debt securities to $50.6 billion on March 14 from $129.1 billion in September 2008. “Investors are going to demand a higher spread for the decreased liquidity,” Marc Gross, a money manager at RS Investments who oversees $3 billion in fixed-income funds, said in a telephone interview.

To contact the reporter on this story: Sridhar Natarajan in New York at

To contact the editor responsible for this story: Alan Goldstein at

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