Stocks surge while investors turn to junk bonds

Markets rose last week. The MSCI All-Country World Index surged 3.2 percent as several major stock market indices broke or came close to all-time highs.

The FTSE 100 Index soared 4.2 percent to close at a record high. The Russell 2000 Index rose 2.8 percent to an all-time high.

The Nasdaq Composite Index soared 3.2 percent, the Standard & Poor’s 500 Index jumped 2.7 percent and the STOXX Europe 600 Index rose 1.9 percent. The three indices are now around 0.4 percent off their respective record highs.

Stocks rose last week as the Federal Reserve indicated after its monetary policy meeting on Wednesday that it was not in a hurry to raise interest rates.

Bonds also rose last week. The yield on the United States 10-year Treasury note fell 18 basis points to 1.93 percent. Germany’s 10-year bund yield fell eight basis points to 0.18 percent.

With government bond yields so low, especially in Europe, investors seeking yield are being forced to invest in lower-quality debt. From Bloomberg today:

In the negative-yield vortex that is the European bond market, investors are discovering just what lengths they’re willing to go to generate returns.

Norway’s $870 billion sovereign wealth fund said this month that it added Nigeria and lifted its share of lower-rated company debt to the highest since at least 2006. Allianz SE, Europe’s biggest insurer, is shifting from German bunds to bulk up on mortgages. JPMorgan Asset Management is buying speculative-grade corporate debt to boost returns.

This in turn is pushing even US borrowers to sell junk bonds in Europe to take advantage of investor demand for higher-yielding assets, according to another Bloomberg report.

“It all revolves around QE and the dynamic that it’s creating, which is forcing people out of low-yielding government paper into higher-yielding assets,” said Stuart Stanley, a high-yield fund manager at Invesco Asset Management Ltd.

“We are wandering into uncharted territory that’s subject to uncertainty and mistakes,” said Erik Weisman, a money manager at MFS Investment Management. “This probably means we end up seeing all these reverse in a very unpleasant fashion.”