Flight to High-Quality Corporate Bonds

By Dave Sekera, CFA, Morningstar

Despite the shenanigans in Washington (or more likely because of them), buyers snapped up investment grade corporate bonds last week. Investors sought after the highest-rated issuers, such as Walmart, Microsoft, and Johnson & Johnson. Early in the week, there was market chatter that Chinese investors were out buying the most highly rated bonds, and the speculation was that those accounts were reallocating from other asset classes such as agencies and Treasuries. Insurance companies were also out in force, searching along the entire yield curve for highly rated issuers.

High-quality corporate bonds are providing a port in the storm, as investors are comfortable owning the debt of companies that have transparent financial reporting and significant cash reserves on the balance sheet. It's hard to argue against owning Microsoft bonds at a spread over Treasuries. The company has nearly $53 billion of cash and short-term investments on the balance sheet against $12 billion of debt and provides much greater financial transparency.