The sensitivity of US corporate bonds to a rise in interest rates is near record levels, just as higher growth and inflation are expected to return in coming months as the nation’s coronavirus-hit economy recovers.
Duration, which captures the expected time it will take for the price of the debt to be repaid in total cash flow, has been on an upward march for a couple of years. The rise has been driven by a rush of companies issuing longer-maturity debt at a time when borrowing costs are low.
The average duration for investment-grade corporate bonds now stands at 8.3 years, according to data from ICE Data Services, up from 7.7 years at the start of 2020 and just 6.5 years a decade ago.
The shift heightens the risk that a rise in Treasury yields — a more pressing possibility in an economic recovery — will prompt a sell-off in corporate debt markets.
Nonetheless, yield-starved investors continue to lap up longer-dated bonds that are most in danger if rates do start to climb. Already this month, tech group Apple has issued a $1.75bn 40-year bond, as part of a $14bn fundraising, while Alibaba has raised a $1bn 40-year bond.
“It’s kinda wacky,” said Jim Shepard, who runs investment-grade bond issuance at Mizuho in New York. “At a time when you would want greater insurance against a rise in interest rates, you are buying something more exposed to it.”
Two things can affect duration. First, the maturity of a bond, with longer bonds having a longer duration. Second, the coupon on a bond, with lower coupons more sensitive to a rise in interest rates eroding the value of the debt. Alibaba sold its 40-year bond with a 3.25 per cent coupon, while Apple is paying a rate of 2.8 per cent.
“There is a lot of sensitivity to moves in the Treasury market,” said Monica Erickson, head of the investment-grade corporate team at DoubleLine Capital. “It’s something you need to be mindful of.”