U.S. junk bond yields breached record lows for the second time this year as the Federal Reserve’s long-term zero interest rate policy and hopes of a wide distribution of a coronavirus vaccine push investors into riskier assets.
The average yield for the Bloomberg Barclays U.S. corporate high yield index plummeted to 4.45% on Thursday evening, sinking below the previous record of 4.56% set on Nov. 9. That had breached a low not seen since June 2014.
The market has rallied since multiple pharmaceutical companies announced they were close to Covid-19 vaccines, with shots due to get underway in the U.K. next week. Expectations of a split U.S. Congress, which would make significant changes to business taxes and regulation unlikely, have also given the market a lift.
Some investors are looking ahead to a return to normal life by the second half of 2021. They’re betting that businesses will be able to boost earnings that have plummeted during the pandemic, and start to pay back the billions of dollars of debt that they borrowed to get them through the crisis.
Another big driver of the rally is the Fed’s zero interest rate policy, which is pushing investors into riskier debt to bolster returns in the never-ending hunt for yield. The Fed is set to pull back its support of corporate debt at the end of the year, but ultimately investors view that move as adding modest risk to a market that’s otherwise strong enough to stand on its own.
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— With assistance by Gowri Gurumurthy
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