According to data provider Lipper, in August investors pulled a net $46.2 billion from stock funds and added $13.5 billion to taxable bond portfolios.
Recently the corporate bond yield, or return for the loan, was 3.85 percentage points, below the average for this year. Normally investors move to purchasing bonds when they are nervous about growth, but the move to corporate bonds are a sign investors don’t expect a slowdown pushing companies into default.
“It really is the worldview of growth being sluggish but not necessarily negative,” said Brian Jacobsen, a senior investment strategist at Wells Fargo Asset Management, who is advising clients to make the shift. “Even with the trade drama, even with Brexit, those geopolitical issues aren’t going to compromise corporate credit.”
In an effort to minimize risks investor are moving toward corporate bonds. Taking gains out of the stock market, which may be reaching its high, and buying bonds helps cushion against blows from a slowing economy or the trade fight with China. Company default rates are currently lower than their long-term average, and analysts say there appears to be little risk of a large increase should the economy enter a recession.
Wells Fargo Asset Management is recommending increase allocations to BBB-rated, lowest-rated part of the investment-grade credit spectrum, and BB corporate bonds, highest part of the speculative-grade market. They believe bonds sold by companies with those ratings have the potential to post gains and are unlikely to face the kinds of risks that could lead to default, Mr. Jacobsen said.
That doesn’t mean investors should add a lot of risk in their bond portfolios, said Mark Luschini, chief investment strategist at Janney Montgomery Scott. As long as the economy is growing, investors should stick with stocks and boost their safer assets by buying higher-quality corporate bonds or Treasurys rather than junk debt.
“One should be more careful and therefore lean into quality,” which offers better protection against stock market volatility, he said.