Merrill: "Future 10% High-Grade Corporate Bond Returns ‘Mathematically Impossible’"

From Barron's Income Investing blog:

After a three-decade bull run, investment-grade corporate bonds have run out of room to generate any future double-digit returns. That’s basically the conclusion of Bank of America Merrill Lynch credit strategist Hans Mikkelsen, who says this year’s 10% return for the high-grade market pretty much represents the last of its kind, saying it’s “mathematically impossible” to replicate that type of return again. Mikkelsen writes:

How do you start the year with a yield of 3.88% and generate 10% returns by mid October? It seems unlikely that anybody could have predicted by the end of last year that HG credit spreads would tighten by 100bps and 10-year Treasury yields decline about 20bps. You could have predicted the spread tightening, or the decline in interest rates – but not both, in our view. Yet both happened because the sharp decline in uncertainties – though clearly not in a straight line – reduced credit risk, while growth declined so much that the Fed had to backstop it. The average yearly total return in high grade for the past three decades is 10% as well. With current yields of about 2.75% we think it is mathematically impossible to generate another 10% return going forward. With today’s market we have reached our 155bps year-end spread target for high grade. However, with improving fundamentals and strengthening technicals we mark-to-market our year-end target to 140bps, or 5bps inside the post-Lehman tights reached in April last year.