Big Funds Bet the 'Anything But Bonds' Trade Is Poised to End

(Bloomberg) -- Big US bond investors have been aggressively shifting money into long-dated notes, betting that the unloved asset class will be one of the winners from eventual interest rate cuts.

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The largest 20 mutual fund managers in the US have increased duration over the past two months as yields climbed, according to research by JPMorgan Chase & Co. Investors have been building positions by "piling into" high-grade corporate bonds to avoid the negative carry of government debt, said Nikolaos Panigirtzoglou, a global market strategist at the lender.

Long-dated corporate bonds are winning back investors who fled as the market dialed back bets on imminent easing by the Federal Reserve. Now, the allure is returning as markets price in two rate cuts this year after data showed US inflation ebbing for the first time in six months.

"History shows pretty consistently that yields rally hard starting three to four months before the Fed actually starts cutting," said Gershon Distenfeld at AllianceBernstein Holding LP, who recently extended duration in the $23 billion American Income Portfolio he manages. That could happen "a month or two from now, six months from now, or not until 2025," he said.

The "anything but bonds trade" may now have run its course and long-duration debt is set for a comeback in the second half, strategists at Bank of America Corp. wrote in a note published Friday.

Fund managers increased their allocation to bonds this month by an average of 7 percentage points from April, according to a survey conducted by the lender, though they remain underweight overall. Cash levels, by contrast, fell to the lowest in almost three years.

Companies Respond

Some companies have responded to the demand for duration, with health care firm Merck & Co. Inc. this week offering a 30-year security, the longest-dated euro corporate bond since 2021. The benefit for corporates is that rates on longer-term European debt are below those on short-term credit, allowing treasurers to lock in lower borrowing costs.

"Companies are taking advantage of the low prevailing credit spreads in the market and locking in that risk premium for their borrowings," said Luca Bottiglione, head of European credit research at Zurich Insurance Group AG.

The Merck deal helped boost the average tenor of corporate bonds issued in the region's publicly-syndicated debt market this month to about 7.6 years — the longest since October 2021, according to data compiled by Bloomberg. The data tracks euro, pound and dollar sales in the region and excludes perpetual and hybrid notes.

"Corporations might be finding a sweet spot in the markets right now," said Althea Spinozzi, head of fixed income research at Saxo Bank AS. "They can lock in the lowest yields on the yield curve, while a substantial number of investors, eager to speculate on an aggressive rate-cutting cycle, are willing to extend duration."

Click here to listen to a podcast on how TCW expects private debt 'accidents' as stress builds.

Week in Review

It's turning into a sellers' market once again in leveraged finance, with all that implies, including an asset-sales revival on the horizon and investors so willing that risk management becomes a lesser priority.
Buying debt sold by the lowest-rated countries scares off most investors. On emerging markets desks across the globe though, that type of risky wager is being dubbed "special situations" — and its popularity is growing.
The rise of electronic trading and growing popularity of portfolio trading has had an unintended consequence for the US corporate bond market: making private credit even more attractive.
Demand for bonds from collateralized loan obligations is helping Europe's riskiest companies bake in early gains from interest-rate cuts expected as soon as next month.
Companies flooded the asset-backed securities market with offerings this week, selling the most bonds this year as they looked to borrow before inflation reports added extra uncertainty to markets.
Citizens Financial Group Inc. is looking to raise capital with a previously out-of-favor type of preferred shares that is now staging a comeback among US regional banks.
Agile Group Holdings Ltd., a Chinese developer of villa apartments and high-rise homes, defaulted for the first time on publicly issued dollar bonds, underscoring lingering distress amid the nation's unprecedented property crisis.
Merck & Co. Inc brought Europe's longest-dated corporate bond in the common currency since 2021, in what could soon become a rare chance for investors to get their hands on healthy yields before central banks finally begin cutting rates.
McDonald's Corp. sold Canadian dollar bonds for the first time since 2017, joining a string of US companies that have been borrowing in the market to diversify their currency exposure.
Ferrari NV slashed its cost of funding during the course of a rare bond offering by the luxury carmaker.
Blackstone Inc. and Goldman Sachs Asset Management are providing the biggest portions of a roughly $900 million direct loan to Depot Connect International as it refinances more expensive private debt.
Peloton Interactive Inc. has hired JPMorgan Chase & Co. to raise around $850 million through a new loan sale that will refinance existing debt.
Banks including Barclays Plc, Deutsche Bank AG and UniCredit SpA are lining up over €800 million ($870 million) in debt financing to back TDR Capital's bid for Italian discount retailer Acqua & Sapone.

On the Move

Fortress Investment Group hired former Goldman Sachs Group Inc. managing director Michel Dimitri. Dimitri will focus on private credit and report to Andy Frank, who leads global sponsor finance.
Apollo Global Management recruited Chris Adair as a managing director and fixed-income specialist. Adair joins from SLC Management, where he was a senior managing director and head of strategic partnerships.
Brinley Partners, a private credit firm with more than $4 billion of assets under management, hired Rex Chung, most recently a partner at Hunter Point Capital.

--With assistance from Brian Smith, Cecile Gutscher, James Crombie and Helene Durand.