Bond Funds Seen Holding Nose, Swallowing to Feed Yield Appetite

(Bloomberg) -- The demand for yield is forcing money managers to pile into debt offerings even when they sense that prices might not be so attractive, said Mark Luschini, the chief investment officer of Janney Capital Management.

“The insatiable chase for yield continues, and bond funds, by virtual mandate, have to be buying credit somewhere,” Luschini said Wednesday in an interview on Bloomberg Television. “In consequence, you have sort of a natural buyer for it, even if they have to hold their nose while they’re doing it.”

Investment-grade companies have sold more than $950 billion of bonds in 2017, on pace for the busiest year on record, according to data compiled by Bloomberg. British American Tobacco Plc sold $17.25 billion of bonds on Tuesday in one of the largest deals of the year after receiving $35 billion in orders from investors.

And Elon Musk’s Tesla Inc. is testing appetites in the junk-bond market with a $1.5 billion debt offering to help support production of its mass-market Model 3 electric car. The cash-burning company may pay no more than five percent -- below the average yield on junk debt -- on bonds rated six steps below investment-grade. Luschini was asked if investors should be buying Tesla bonds.

“There’s a difference between want and need,” he said. “I don’t know that I’d want to chase after yields given the compression that’s occurred in that space, because obviously it leaves little room for any kind of margin of safety. The vulnerability to any, even modest, uptick of interest rates or some kind of increase in defaults that would occur may not be factored in sufficiently to, I think, compensate investors fairly.”

‘The Problem’

He joins money mangers including Cliff Noreen, who helps oversee more than $160 billion at Massachusetts Mutual Life Insurance Co., in citing the “insatiable” investor demand for pushing down yields on corporate debt. Jeffrey Rosenberg, who is chief fixed income strategist at BlackRock Inc., appeared on the same program as Luschini Wednesday and said the trend holds across bond markets.

“Here’s the problem: everything in credit is at the tights,” Rosenberg said. “The reach for yield is apparent in every asset class.”

The extra yield that investment-grade U.S. corporate bond buyers demand over Treasuries is near the lowest levels since 2014, according to Bloomberg Barclays index data. Luschini said investors may find opportunity instead in European equities and in Japan for securities at “reasonable valuations.”

Those markets offer “pretty decent growth profiles and an earnings curve that is much steeper than that of the U.S.,” he said.

--With assistance from Alix Steel and David Westin

To contact the reporters on this story: Natasha Rausch in New York at nrausch@bloomberg.net, Claire Boston in New York at cboston6@bloomberg.net.

To contact the editors responsible for this story: Dan Kraut at dkraut2@bloomberg.net, Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Kenneth Pringle