In anticipation of a change in direction from the Federal Reserve, bond dealers are investing more and more in corporate debt. According to EPFR data reported by the Financial Times, in the month preceding November 20, inflows into bond funds totaling over $16 billion represented the highest inflows into corporate bonds since July 2020. Of that total, about $11.4 billion was allocated to junk bonds and the remaining portion to investment-grade debt. This occurs in the context of mounting hope that the Federal Reserve may have completed its cycle of rate hikes and may soon begin cutting rates.
The extra interest rate that is required for corporate debt over secure Treasury bonds, or spreads, has decreased for both types of assets. While the margin for high-grade debt decreased to 1.17 percentage points from 1.3 percentage points, the premium on junk bonds decreased to 3.95 percentage points from 4.47 percentage points. According to a Bank of America study, corporate bonds had outflows of over $18 billion between the beginning of the year and October. This spike in inflows represents a major turnaround. High-yield debt is currently considered by most investors to be the best contrarian investment for 2024, according to a Bloomberg survey released this month. Compared to commercial real estate loans or regional bank debt, trash bonds are actually thought to be a more dependable investment.
