Record low U.S. Treasury rates continue to push investors to find yield elsewhere, and it seems that corporations are rushing to meet the demand. Matt Tucker explains.
In my last Blog post, I discussed how the search for income in a low interest rate environment sparked flows into high yield bonds, and how this segment has seen a sell-off in recent months. Looking at the corporate bond market over the past few years, we see that there has been a growing demand for both investment grade and high yield corporate bonds. This rise in demand has been met by a substantial increase in the size of the corporate bond market.
Market Realist – The above graph shows that yields are extremely low for government bonds across the spectrum. Short-term bonds (SHY) with maturities of one year are giving yields of 0.1%. Ten-year instruments (IEF) give returns of 2.6% and 30-year Treasuries (TLT) give returns of 3.3%. Yields have been low primarily due to three reasons:
- The Federal Reserve’s bond buying program, first introduced as a stimulus to the recession-hit U.S. economy in 2010, has kept yields low. The program is likely to end in October.
- The rising geopolitical tensions in Ukraine, Russia, and Gaza have induced panic, which has led to investing in U.S. Treasuries since they’re often considered a safe haven asset.
- The yields in Europe (EZU) have been driven to historic lows due to the economic slump in the Eurozone. U.S. Treasuries (TLT) look better in comparison.
Read on to the next part of this series to learn why corporate debt offerings are rising.