The rising bearish sentiment may come from expectations that the market could pullback after rallying this year. Investment-grade bonds have returned about 9.5% and U.S. junk-rated corporate debt advanced 14.5% so far this year.
“The levels are unjustifiable,” Jack Flaherty, a portfolio manager with asset manager GAM, said of the prices of some high-yield debt. “We’re not playing in nine out of 10 deals.”
Corporate debt funds have experienced billions in net inflows since the U.S. Federal Reserve left rates unchanged. Some observers argued that the inflows reflected the renewed interest in corporate debt after the prospect of a delayed tighter monetary policy. Meanwhile, loose monetary policies abroad, including a bond-purchasing program out of the European Central Bank and Japan, have pushed foreign investors to the relatively more attractive U.S. securities, which provide much better yields in an environment where almost $13 trillion in global Treasuries trades with a negative yield.
“High yield continues to shrug off negative news even as many participants believe the market is overbought,” John Dixon, a junk bond trader at Clearview Trading, told the FT.
For more information on the credit market, visit our corporate bonds category.