Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

Investors grasp for yield with bond buys

Public water utility workers fix a pipe in Old San Juan. The island-territory of the United States is on the brink of a debt crisis as lending has skyrocketed in the last decade with the government issuing municipal bonds mostly to finance pensions.
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Recent strong demand for relatively risky bonds adds to the case that investors are reaching for yield, meaning they are willing to bet more on lower returns in the absence of other options.

Prominent hedge fund firms Och-Ziff Capital Management, Fir Tree Partners, Perry Capital, Paulson & Co., and Brigade Capital Management each bought more than $100 million of new Puerto Rican municipal bonds in March, according to The Wall Street Journal.

The U.S. territory is seen as one of the riskiest municipal bond markets in the world, and its rating was cut to junk status earlier this year. The 21-year bonds originally were sold at a yield of 8.72 percent,which has risen to 8.84 percent according to the report.

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Greece also raised more than $4 billion on bonds in a Thursday auction. Thanks to strong demand, the five-year bonds were priced to yield 4.95 percent—sharply lower than initial estimates of 5.25 percent to 5.5 percent, according to the Journal.

Strong demand for Greek bonds

And five-year government bonds from Spain recently featured the same yield as their U.S. Treasury equivalent because of strong demand. The yield for Spanish debt was 1.72 percent as of Thursday morning; U.S. Treasurys are at 1.62 percent.

Both Spain and Greece have relatively weak economies compared to others in Europe.

"There's definitely a reach for yield--people are trying to find it anywhere they can," said Jack Flaherty, co-portfolio manager of GAM's $18 billion unconstrained bond strategy. "'No one is going to really default so just grab for yield'--that's the mindset now."

Flaherty said local-currency government bonds from Mexico and Brazil, for example, offer a better reward for the risk. A Brazilian 10-year bond yields 12.5 percent; the rate is 6.15 percent for the Mexican equivalent.

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