Between 16 year old climate grouch Greta Thunberg (aka Scoldilocks) being Time Magazine’s “Person of the Year,” The Fed doing nothing yesterday and Trump softening his stance of China tariffs, we are seeing securitized debt risk premiums matching those of short-term corporate bonds.
(Bloomberg) — Owning high-grade corporate credit was one of the best trades of 2019, but some market watchers say it might be time to start looking elsewhere to lock in juicy yields.
The bonds have returned more than 14% this year through Wednesday, on track for the best performance in a decade. While investors broadly expect 2020 to be another strong year thanks to demand from global investors fleeing negative rates, some say the notes are starting to look expensive. All-in yields have declined more than 1.3 percentage points this year to 2.85%, making piling into the securities a trickier proposition for buyers like pension funds that need to meet ambitious return targets.
To find value in a world where $11.8 trillion of debt still yields less than zero, some bond buyers are turning to the structured-products market, where they say high-rated alternatives like asset-backed securities can offer more reward for less risk. They’re eyeing opportunities in collateralized loan obligations and mortgage-backed securities, as well as even more unusual structures like notes backed by restaurant franchise agreements.
“Valuation has become a bit of a challenge,” said Gene Tannuzzo, deputy global head of fixed income at Columbia Threadneedle, which oversees $469 billion. “If you want short cash flows, I think the better bang for your buck is in structured products.”
Banks such as JP Morgan Chase, Wells Fargo, Citi and Bank of America likely would have selected Jerome Powell as Time Magazine’s “Person of the Year.”