Last week set a seven-year record for the amount of money flowing into bond funds, according to the Investment Company Institute, and catastrophic macro events are largely to thank.
In China and the U.S., fears of the coronavirus propped up the bond market. The virus has halted global tourism, threatened corporate revenue, and driven investors into government bonds. Treasury yields for both nations have plummeted as demand continues to rise.
What's The Strategy?
In Europe, private equity firms and asset managers have begun to develop high-risk funds for the debt of financially distressed companies. They expect subdued economic growth, a rise in default rates, and a pressure on corporate bonds toward discounted prices.
“We have seen a significant increase in the number of stressed and distressed European corporates being screened during our team’s discussions,” Mark Brown of private equity firm KKR told Reuters. “We do think we are late-cycle and, as the fund is focused on deploying capital in a cyclical downturn, having capital ready to go makes sense.”
If companies recover, bond prices could peak and yield high payoffs. The distressed debt is made all the more appealing by the yield-compressing stimulus of the European Central Bank. Many European corporate bonds offer yields near or below zero — a circumstance that could elevate volatility in an economic downturn.