Investment demand for speculative-grade debt and high-yield bond exchange traded funds has been so high that yields on the riskiest U.S. companies are now below that of inflation.
The rally in corporate debt rated below investment grade has also pushed yields down to record lows around 4.54%, compared to consumer prices that rose 5% in May year-over-year, the Wall Street Journal reports.
The negative difference between junk bond yields and inflation marks the first time on record that speculative-grade debt yields have fallen below the rate of inflation, according to Bespoke Investment Group.
Fixed income investors have typically turned to high-yield bonds for their attractive income-generating opportunities with high real yields. However, buying bonds that offer yields less than inflation means locking in a loss based on real yields.
Investors, though, may be betting on a rebounding economy fueled by aggressive stimulus measures that will eventually lead to a reversion to pre-pandemic normalcy with slow and steady growth and moderate inflation, which would make high-yield bonds very attractive.
Gennadiy Goldberg, U.S. rates strategist at TD Securities, argued that the inversion reflects investors seeking out alternative income streams in a stubbornly low-rate environment, even in riskier market segments.
“This is a function of too much cash in the system and too few attractive assets for investors to put their cash into,” Goldberg told the WSJ.
According to Lipper data, U.S. high-yield funds have enjoyed net inflows of $893 million for 2021 as of June 30, reversing outflows earlier in the first half of the year.
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