Nothing is as safe as US Treasury bonds, right? Maybe not. Investors have been lapping up corporate bonds, particularly those of Exxon Mobil and Johnson and Johnson.
So much so that the yields on those companies’ bonds are lower than those of Treasuries. This means investors view the corporate issues as safer bets than the government issues.
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At this point, this can only be said of a few bonds issued by corporations. But fundamental changes in the health of US companies compared to the US government may indicate a longer lasting trend.
If the numbers grow into the dozens, the situation becomes a game changer. Corporate yields have dropped below Treasury yields several times over the last 30 years but the situation has never lasted long.
Since the turn of the 20th Century, investors have measured corporate borrowing rates in relation to what the government pays. But there are several components that threaten to change that.
Investor funds are pouring into corporates at a much faster rate than into Treasuries. The supply of high quality debt is shrinking and high rated corporates typically pay a bit more than Treasuries.
All that debt issuance has filled corporate coffers, putting their balance sheets in the best position ever since they can borrow at the lowest rates in history.
The prospect of the fiscal cliff is also feeding into the uncertainty surrounding Treasury bonds. As the US debt and credit profile gets worse, corporate America
becomes leaner and meaner.
Those combinations indicate investors may not let up buying corporate debt anytime soon, especially with the perception that corporates are the new safe haven.