The Bull Market in Corporate Bonds

According to Bloomberg, YTD net inflows into mutual funds that focus on corporates, bank loans, and munis are $295 billion, compared to net outflows of $31 billion in equity funds. The flood of money moving into the corporate bond market has driven down yields and compressed credit spreads in some sectors to levels last seen in 2007. For investors who initiated positions in corporates early this year, the rally has been breathtaking. Short-term investment-grade bonds are up double digits in an environment where short-term Treasuries yield less than 1%. For savers, retired investors, and those soon to be retired, the lack of yield available in the fixed-income space is frustrating. The risk of much higher inflation and interest rates makes long-duration Treasuries unappealing, and the paltry yields at the short end of the Treasury yield curve are simply depressing. Two-year notes yield less than 1%, and five-year notes yield only 2.38%. The only place to pick up conservative yield is in investment-grade corporates. The low end of the investment-grade ratings scale still offers an additional 100-150 basis points over Treasuries.