The Daily Update - August Rush

Bonds almost universally (sorry Argentinean bond funds) have been performing strongly in recent months, and we’ve written earlier this week on how the move continues to show momentum both through longer-trend fundamentals such as demographics and shorter-term indicators in the yield curve and market sentiment. As we close out the month of August, the flows and performance in US investment-grade corporate bonds certainly don’t show any signs that the move has run its course or is in any way slowing yet. This month US corporate bonds look likely to mark their best month in over a decade with funds in the sector also seeing massive flows - with over $160bn so far this year 2.5x equivalent flows last year and $6.5bn of inflows in this past week alone.

Investors are moving into this space to pick-up some additional yield (or less negative yield) with now $17 trillion of bonds globally with negative yields, $1 trillion of which is corporate. In fact, if gold hadn’t also rallied in price recently, the total value of negative bonds globally would already be double the total value of gold ever mined: which is at around $9 trillion at present. Of course, investors could pick up even more yield by entering the emerging market or high yield spaces, but flows into these have been multiple times smaller in recent weeks and months, demonstrating that the reach for yield is increasingly tempered by broader economic concerns. This also corroborates with flows out of equities over the past couple of weeks.

With our global mandate and focus on value within the investment-grade space, at present, we’re able to find equivalent single- and double-A credits with higher spreads than the average triple-B bond - which we believe gives us better pick-up in yield versus the narrow-mandated US corporate credit investor, at the same time as giving us much better downside protection compared to funds focused on high-yield.

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