US firms rush to issue bonds as investor caution pervades

Appetite for corporate bonds is on the up in the US as prevailing economic uncertainty persuades investors to err on the side of caution.

Concerns over a looming double-dip recession and deflation in both the US and Europe has led many US investors to believe that corporate debt is a safer and more attractive proposition than holding equities.

This comes despite some analysts pitting US equities at their most attractive relative to corporate bonds for decades.

Wesley Sparks, head of US fixed income at Schroders in New York, believes that the technicals for the corporate bond sector are in good shape.

‘Demand has been outstripping supply,’ he says.

Sparks sees a lot of this demand coming from institutional investors such as insurance companies and pension funds, 'which have built up a lot of cash that they haven’t known what to do with.’

As these institutions reallocate funds from alternatives and equities back into fixed income, and cash rushes into the sector, Sparks is not worried that the market will be affected negatively by a flood of bond issues.

Sparks says there has been ‘a recalibration of expectations’ in regards to interest rates and predicts that ‘low rates will to continue in the range of 3% specifically in the US’.

This is good news for companies as low rates allow corporations to borrow more cheaply therefore making the issue of debt an attractive option for them.

The Schroders fixed income specialist also believes that the macro risks emanating from China and Europe which overshadowed the past quarterly earnings seasons are showing signs of dissipating which should spell good news for the sector.

In the past five years, Sparks' Schroder ISF Global High Yield fund has returned 25.3% while the average fund in the sector delivered 19.2%