So much for the big bond dump.
Despite a solid January for global equity inflows, investments in bond funds have a slight edge over equities lately, according to EPFR Global, and here at home the Canadian market sees little sign of a massive bond selloff.
It's quite the opposite, actually. Fixed-income investors are keeping their corporate debt close to their chests, riding the latest wave of spread tightening.
An explanation for the current environment boils down to a simple question for investors, according to the fixed-income team at Desjardins Securities: "If I sell you this corporate bond, what will I replace it with?"
New debt issuance has been rather slow here so far in 2013 – just over $11-billion raised in the first two months versus nearly $21-billion last year, though there's still a week to go in February – and that's forced institutional investors to hold onto their favourite corporate names. That's led to a "spectacular bid" for top corporates.
For some, the sudden interest in equities emerged too quickly for there to be a substantial change. As a portfolio manager told Reuters last week, "I think the immediacy of the 'great rotation' is way too early," adding that "fixed-income investments have been too good of an investment for too many years for investors to just reverse course." And as Desjardins points out, there's been spread compression between industry groups in the fixed-income world, so "everything now trades on top of one another. This trend can only be broken if there is a massive shift of investor sentiment out of bond funds in favour of equity offerings or if we see a large amount of issuance by more household names."
(Tim Kiladze is a Globe and Mail Capital Markets Reporter.)
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