(Bloomberg) -- The corporate-bond market is seeing a surge of trading as the Federal Reserve moves closer toward cutting interest rates, setting off a rush by investors to lock in elevated yields.
Trading volume in blue-chip bonds rose nearly 20% during the first half of the year and increased 13% for high-yield securities, according to Barclays Plc. Many exchange-traded bond funds have seen similar jumps: volume in the iShares iBoxx $ Investment Grade Corporate Bond ETF is up 33% for the first seven months compared with the same period a year earlier.
The rate-cut speculation that has driven the inrush was given support on Wednesday, when Fed Chair Jerome Powell indicated the central bank could start easing monetary policy at the next meeting in September. Any cuts would likely represent the beginning of the end of a tightening campaign that started in 2022 and has left corporate bond yields at levels not seen since the Great Recession.
The recent demand has outstripped even the increased pace of new debt sales, driving money managers to the secondary market to get the securities they want.
For investment-grade bonds, the surge in volume has generally been concentrated in some of the most frequently traded notes, according to Barclays. But the growing liquidity has had far-reaching impacts by cutting transaction costs and allowing systematic money managers using black-box trading models to get more of a foothold in the market.
“The fact that rates have stabilized at a higher level and now they’re getting ready to start cutting are things that are going to draw people into the fixed-income world,” said James Seyffart, Bloomberg Intelligence strategist. “There is a lot of money coming into fixed income.”
The shift into bonds has been fueled by growing signs that inflation and the labor market is cooling, giving the Fed leeway to pull its benchmark rate back from a more than two-decade high to ensure that its tight policy doesn’t cause the economy to stall.
Such cuts can be a boon for outstanding bonds of all types, if yields broadly fall and prices rise. While borrowing costs have come down from the peaks seen late last year, they remain over 5% on investment-grade corporate debt — a level that hadn’t been seen from 2009 until the Fed’s rate-hike campaign.
READ: How a Year of the Fed’s High Rates Has Affected the US Economy
An expanded use of portfolio trading — which allows investors to buy and sell large lots of different bonds at once — has contributed to the increased volumes, according to Nick Adragna, JPMorgan Chase & Co.’s global co-head of investment-grade, portfolio and macro credit trading. The growth in volumes has helped to narrow the gap between bid and ask prices, making it cheaper for investors to trade corporate bonds.
“The breadth of liquidity has increased dramatically,” he said.
The pace of trading is likely to wane in August, when markets typically see a slowdown because of the late summer vacation season. Trading volumes for that month in the high-grade secondary market has only averaged $20.1 billion per day for the last four years, according to JPMorgan, making it one of the slowest months of the year, behind only December.
But in September, corporate bonds’ excess returns — or the amount by which they exceed Treasuries — typically rise, strategists at Barclays wrote last week. And this time around, the market may get an additional push as futures traders price in that the Fed will ease policy in September and make three quarter-point cuts by year end.
“We’ve had pretty strong inflows from various sources including fund flows, foreign buyers, and insurance buyers that shouldn’t change,” said Nicholas Elfner, co-head of research at Breckinridge Capital Advisors. “It seems to us that demand is quite strong.”
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