Investors turn to global corporate debt Investor appetite for higher-yielding alternatives to top-tier government bonds has sparked a sharp rally in global corporate debt, pushing companies" borrowing costs to all-time lows. Average yields on global corporate debt touched an all-time low of 3.91 per cent on Tuesday, down from a high of 4.75 per cent at the start of the year, according to a Bank of America Merrill Lynch Global Broad Market Corporate and High Yield index. Investors are backing away from global equity markets in favour of high-quality government and corporate debt because of market volatility stemming from the eurozone debt crisis and from growing fears of a slowdown in growth. "The absolute dearth of yields across the globe has investors now clamouring for any extra basis point they can get," said Michael Mullaney, who manages stocks and bonds investment at Fiduciary Trust Co. Investors are increasingly favouring debt issued by companies worldwide in spite of the higher risks associated with such investments because yields on benchmark US Treasuries and German Bunds are so low. The return on the BofA Merrill Lynch index this year stands at 5.37 per cent, compared with 2.2 per cent for government bonds. But there are risks as investors reach for higher yields. While overall global corporate default rates remain below long-term averages, a rise in missed payments by US corporations helped to nearly double the number of global corporate defaults this year. "The problem here is that a lot of these investors don't realise the principal risk that is involved when buying bonds at such absolute low levels of interest rates," Mr. Mullaney said. These investors should not be indiscriminate and better keep maturities on these bonds very short - three years or less. Global defaults have risen to 39 up to the start of this month versus 21 in the same period a year ago, according to Standard & Poor's data. But for now, the move to higher-risk corporate debt is paying off for most investors. Even after the sharp drop in global corporate debt yields, they are on average about 3 percentage points higher than those of government bonds. In addition, analysts said the rally in corporate debt showed no sign of abating and balance sheets of several large global corporations remained sound. Several companies took advantage of lower borrowing costs this year to refinance outstanding debt to more attractive rates. "I don't think we have reached a bottom on those corporate bond yields by any stretch," said Adrian Miller, a global markets strategist at GMP Securities. In this environment, it's no longer just a question of yield. It's a question of valuations and rotation out of troubled regions and troubled balance-sheets and into sound ones.