U.S Blue Chip Debt Worries


While U.S. blue chip bonds have weathered the recent turmoil in the global economic markets, some hedge funds are now eyeing the $4.5 trillion market in investment grade bonds for signs of weakness.

Yield Gap

There is growing concern among analysts that the markets as a whole may have been so busy downgrading junk and energy bonds that they are missing issues in other traditionally blue chip companies. These companies are having their own problems as the global economy struggles to stabilize.

The difference in yield between U.S government bonds and investment grade corporate issues is already over 2 percent. This is the first time there has been this large a gap since the Greek default in 2012 which decimated the bond markets. The increase in yield is usually an indicator that investor confidence in investment grade corporate bonds is waning and could lead to some of the larger players unwinding their positions.

Economic Concerns

While the U.S. economy is not showing any significant signs of a contraction, with unemployment down to 4.9% in January and financing for performing firms still easily available, investors across the board are becoming more risk averse. Traditionally, investment grade bonds are held by large institutions such as insurers and pensions funds, with mutual funds holding around $1.5 trillion at the end of last year.

However, individuals removed close to $65 billion last year from investment grade bonds held in mutual funds, which was the first time that net funds have flowed out since the financial crisis in 2008. The other issue is that with commodity prices not showing any signs of recovery, other blue chip bonds are facing a tough market. This may encourage large players on the market to bet against those issues. With corporate borrowing at record levels, this traditionally very low risk market may actually be riskier than many investors realize.


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