Trouble in Corporate Bonds

When interest rates rise, government bonds are the first investments to suffer. Since they’re considered to have little or no credit risk, their prices adjust quickly to changes in rates. Corporate bonds, both investment-grade and high-yield, make small adjustments to interest rates. But investors in them are more focused on credit quality and liquidity.

That’s why this article about recent changes in the credit market is important. It points out that the recent turmoil in the stock market was accompanied by investors selling corporate bonds. It could be a sign of more trouble to come in this market.

Investors pulled $14.1 billion from debt funds, the fifth-largest stretch of redemptions in the week through Feb. 14, according to a Bank of America Merrill Lynch report, citing EPFR data. High-yield bonds lost $10.9 billion alone, the second highest outflow on record. As benchmark Treasury yields traded at a four-year high, it shook the foundations of a key support for risk assets — low rates.

“Investors don’t sell their cash bonds in a big way until they are forced to, which happens when the outflows start picking up more sustainably,” Morgan Stanley strategists led by Adam Richmond wrote in a recent note to clients.