Corporate Debt's a Buy for First Time Since 2016, Survey Says

(Bloomberg) -- U.S. blue-chip bond valuations are so cheap that investors are taking notice and stocking up on the debt, according to a Bank of America Corp. survey.

Around 38 percent of high-grade investors owned more of the debt than their benchmark indexes in January, about double the proportion in November, according to the survey. Those relatively high holdings come as a net 6 percent of money managers view the debt as cheap, based on risk premiums.

It’s the first time since 2016 that investors haven’t viewed U.S. investment-grade corporate bonds as overvalued on a net basis, according to the survey. Risk premiums, or spreads, on the debt reached their widest level since 2016 earlier this month as U.S.-China trade tensions and weaker stock prices spurred more concern about corporate profitability. They’ve since narrowed.

Amid those fears, a growing number of strategists said it was time to start buying corporate bonds again. Bank of America’s Hans Mikkelsen said the economy is still strong, and with tax law changes companies are borrowing less, reducing the supply of company debt. Strategists at Morgan Stanley and JPMorgan Chase & Co. also started recommending that investors add to their corporate bond holdings.

“Credit investors are very optimistic and expect meaningful inflows,” strategists that include Mikkelsen wrote in the note dated Jan. 18. BofAML anticipates bullish sentiment for the next three months, followed by a more neutral stance for a six-month horizon and a bearish outlook for the longer term.

Corporate Debt's a Buy for First Time Since 2016, Survey Says

Investors are even showing a renewed appetite for bonds rated in the BBB tier. Bonds rated BBB by at least one ratings agency have comprised two-thirds of new supply in the investment-grade market in the first 11 trading days of the year, a drastic reversal from last quarter’s BBB presence of less than one half, according to data compiled by Bloomberg. Money managers for much of last year grew more concerned about the debt, viewed as relatively risky because it is just a few steps above junk and because companies have issued so much of it.

Downgrades of BBB tier debt to junk will unfold over years, “and risks should remain limited in the near-term," UBS Group AG strategists including Stephen Caprio and Matthew Mish said in a Jan. 16 note.

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