Corporate Bond Investors Undaunted by Jump in Borrowing Rates

(Bloomberg) -- While they have rattled stocks, rising rates haven’t shaken the corporate bond market.

The spread between U.S. corporate bond and Treasury yields remains near the tightest level in six months, a sign there’s still a healthy appetite for the securities.

“It certainly has been an orderly little bit of a back-up and nothing to get too worked up about,” said Lon Erickson, managing director and portfolio manager at Thornburg Investment Management Inc. in Santa Fe, New Mexico. “From an all-in yield perspective, I suppose it’s an opportunity in terms of getting more bang for your buck than you have for a while.”

Credit spreads, a measure of risk premium, widened slightly this week after a five-day pause as Treasury yields retreated from seven-year highs, yet remain near six-month lows.

Many investors see the orderly rise in rates as sign of a healthy U.S. economy -- which has seen the lowest unemployment in decades, growing wages and consumer confidence -- typically a boon for corporate balance sheets. And the tick higher should also attract buyers that have sat on the sidelines waiting for rich prices to fall.

“Credit is just mirroring what Treasuries are doing,” said Tim Doubek, senior portfolio manager at Columbia Threadneedle Investments in Minneapolis. “If anything, rates going higher is a tailwind.”

But there’s always a risk yields spook companies from selling debt and cost others that need to refinance.

Rising rates have sent investment-grade bond total returns to the worst of any fixed-income asset class so far this month, and this has scared some individual investors.

The iShares iBoxx $ Investment Grade Corporate Bond ETF saw nearly half a billion dollars of outflows on Tuesday, and the U.S. aggregate bond ETF saw the single biggest outflow in the fund’s 15-year history.

The picture isn’t always clear in high-grade credit. “You need to be cautious and selective in your choices -- it’s not just a ‘go buy the market,”’ Erickson said.

To contact the reporters on this story: Natalya Doris in New York at ndoris2@bloomberg.net;Jeremy Hill in New York at jhill273@bloomberg.net

To contact the editors responsible for this story: Christopher DeReza at cdereza1@bloomberg.net, Randall Jensen, Dave Liedtka

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