What an Economic Rebound Could Mean for Corporate Bonds
Risks and rewards in the 2021 corporate-bond market.
Corporate credit spreads have completely recuperated and are back to pre-pandemic levels--a notable move since it was only March 2020 when they reached their second-widest level in 20 years. As such, barring a sharp increase in underlying interest rates, we expect that the corporate-bond markets are setting up to provide a return that's equal to, or slightly lower than, their current yield. As of Jan. 11, 2021, the yield of the Morningstar US Corporate Bond Index (our proxy for investment-grade corporate bonds) was 1.88%, and the yield of the Morningstar US High-Yield Bond Index was 4.38%.
While the issuers that have suffered the most from the pandemic will continue to face headwinds in the first half of 2021, those headwinds will turn into tailwinds in the second half. Though there likely will be additional credit-rating downgrades over the next few months and the default rate will remain slightly elevated, we expect that broad vaccine distribution will pave the way for economic normalization, which will quickly help to bolster the credit metrics of those struggling companies.