Hopes of a faster economic recovery are the catalyst behind U.S treasury yields’ recent spike. The rebound hopes have been affirmed by Moderna unveiling a COVID-19 vaccine that is 95% effective. Even as U.S Treasury yields show signs of edging higher, Chinese Bonds remain under pressure.
Treasury Yield Rally
The Yield on the 10-year Treasury note is closing in on the 1% mark, having touched highs of 0.931% early in the week on the positive vaccine news. The U.S treasury yields have been on a fine run in the wake of Pfizer announcing it is pursuing regulatory approval for a COVID-19 vaccine that is 90% effective in combatting the deadly virus.
U.S investors are increasingly selling U.S government bonds in favor of more risky bets amid the hope of subsiding risk aversion. Stocks, on the other hand, continue to experience capital inflows as investors switch attention to riskier bets.
Investors are increasingly racing into the U.S junk bond funds, buoyed by a rosier corporate outlook amid the pandemic. A good number of companies have posted stellar financial results that can only get better as the pandemic is brought under control with a vaccine.
Junk Bond Capital Inflows
Likewise, investors have turned to funds that buy risky corporate financial obligations in America on hopes that a coronavirus vaccine will help arouse the fortunes of some of the hardest-hit companies. Funds that invest in high yield bonds took in as much as $3.3 billion for the week ending November 11, according to information by EPFR. The capital inflows reversed almost $3 billion withdrawn in the race to the U.S elections.
Junk bond spreads have already shrunk from 5.75 portion points to 5.05 points, underscoring strong demand in the market. Bonds offered by Caribbean cruises, United States airlines, and theater operator Cinemark continue to elicit bids.
A surge in demand for U.S bond ETF assets has already seen assets under management surge to over $1 trillion in assets. The increase affirms versatility for market participants in various market conditions. The increase can also be attributed to many investors finding traditional and novel uses for bond ETFs.
Investors are increasingly turning to bond ETFs in search of income as active managers use them as tools for beating their benchmarks. Institutional investors have also turned to bond ETFs for liquidity and risk management.
The strong demand does not come as a surprise as the US. Bond ETFs have generated more than $168 billion in 2020 and on pace for a record one year.
Chinese Bonds Weakness
Even as U.S Treasury yields continue to edge lower, Chinese corporate bonds are showing signs of weakness. The weakness stems from an executive order by President Donald Trump that bars American investors from holding securities of 31 companies Chinese companies. The ban targets companies with close ties to the Chinese government and military.
China National Chemical Corp debt fell by as much as 4% amid concerns that Trump’s order will result in U.S domiciled funds shunning the company’s bonds. The company’s triple B investment-grade credit debts are widely held by the U.S and European investors.