Home>Video>Corporate Bonds Shine in October

Corporate Bonds Shine in October

Fri, 6 Nov 2015

Strong foreign demand and better-than-expected earnings buoyed corporate bonds last month.

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Video Transcript

Dave Sekera: Corporate bonds performed well in October as tightening in credit spreads more than offset slightly higher Treasury yields.

In the investment-grade market, the Morningstar Corporate Bond Index rose two thirds of a percent for the month, bringing the year-to-date return back into positive territory, up 0.6%. While the average spread of our index is still 20 basis points wider than where we were at the beginning of the year, it tightened 28 basis points and ended October at 160 basis points over Treasuries.

In the high-yield market, the Bank of America Merrill Lynch High Yield Index rose 2.7% in October as the average spread of the index tightened 72 basis points to a spread of 590. Similar to the investment-grade market, the credit spread at the end of October is 84 basis points wider than at the beginning of the year; but year to date, the index has risen a little over a quarter of a percent as the yield carry has offset those wider credit spreads.

The rally in corporate bonds was driven by a confluence of factors: Credit spreads had widened this fall to the point where investors realized that levels were too wide as compared with the underlying credit risk; lower revenue and earnings reported for the third quarter were not a bad as feared; and the ECB has intimated that it will expand its quantitative-easing program at its December meeting.

Demand from foreign investors also helped drive the market tighter as investors in Europe and Asia sought the higher all-in yields that the U.S. fixed-income market provides. In fact, the yield on German sovereign bonds is now trading at a negative yield through their five-year maturity. Foreign investors also looked to U.S.-dollar-denominated investments to protect the purchasing power of their savings as the dollar has been steadily appreciating versus other currencies. 

Typically, in a strong corporate-bond market, high yield will outperform investment-grade to the upside; however, the investment-grade bond market has outperformed the high-yield market year-to-date. International investors look to investment-grade corporate bonds as substitutes for sovereign bonds, whereas weak economic metrics in the U.S. limited credit-spread tightening among high-yield bonds, which are typically more correlated with economic activity.

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