The WSJ reports, "Bonds perceived as safe have produced better returns than riskier ones for the first time since 2010 and the second time since 2006, according to data from Barclays PLC. U.S. government bonds have rallied, high-grade corporate bonds have posted larger gains than junk bonds, and higher-rated junk bonds have risen more than more-speculative ones.
The safe-bond gains underscore the far-reaching effects of a rally in U.S. Treasury prices that few analysts or investors predicted, reflecting softer-than-expected U.S. growth, quiescent inflation and Federal Reserve promises to keep rates low for an extended period".
"The tepid pace of growth this year has caught many investors, strategists and economists on the wrong foot. Heading into the year, many had expected the U.S. economy to accelerate, driving continued gains for riskier assets such as stocks and junk bonds. But the U.S. economy expanded at an anemic 0.1% clip in the first quarter, and data since April have continued to show uneven growth. Meanwhile, euro-zone growth remains weak, and momentum in China is waning.
The shift has upended the market maxim that taking more risk can mean greater rewards. Investors have flooded into securities that promise incremental yield above that available on debt perceived as safe, seeking to compensate for ultralow interest rates and a flat U.S. stock market. But the highest-returning fixed-income asset in 2014—zero-coupon U.S. Treasury debt—is considered ultrasafe and produces no income until maturity.
Now, in response, many investors are doubling down on riskier debt. They contend a resurgent U.S. economy will inevitably reverse the Treasury rally, punishing highly rated debt prices without raising the risk of defaults by junk-bond issuers and others".
"We have a preference for high yield at the moment," said Rachel Golder, who oversees $30 billion in high-yield bonds and loans at Goldman Sachs Asset Management. "We are bullish on the U.S. economy and think that rates will begin to steadily move up and investment grade is more vulnerable."
"Goldman Sachs Group Inc. expects the 10-year U.S. note to yield 3.25% at year-end, up from a recent 2.55%. Ms. Golder said her high-yield fund has 29% of its money in speculative-grade triple-C bonds, near the high end of the fund's historical range and above the 17% triple-C allocation of its benchmark Barclays high-yield index.
Many fans of junk bonds are betting that gains in bonds perceived as safe are likely tapped out. U.S. investment-grade corporate bonds have returned 4.83%, reflecting interest payments and price appreciation, compared with 4.26% on the Barclays U.S. corporate high-yield bond index.
Bank of America Merrill Lynch is forecasting overall 2014 total returns on U.S. investment-grade bonds to be 1.5% and returns on high-yield bonds to be 4% to 5%".
