Morningstar Minute: Muted Returns From Corporate Bonds Ahead
The corporate bond index will struggle to return more than the 2% it already has this year given the likelihood of rising long-term rates and today's historically low credit spreads.
The corporate bond index will struggle to return more than the 2% it already has this year given the likelihood of rising long-term rates and today's historically low credit spreads.
The Morningstar Minute is our quick take on investments, the market, economic indicators, and more. Join us every day for fresh insights from our analyst team.
Dave Sekera: TheMorningstar Corporate Bond Index currently yields about 3% right now and has a six-year average duration (a measure of interest-rate sensitivity). Based on that, the credit spread inherent within that yield is about 117 basis points over Treasuries. Now at 3%, we're a little bit higher than the 2.5% where it bottomed out last year in May, and so it's a little bit better for investors. However, compared with a 15-year average of about 5.25%, it's still very low on a historical basis.
Thus far this year, the index has returned about 2%. However, we would caution that a lot of this return has actually been based on the underlying interest rates, decreasing. For example, the 10-year Treasury has gone from 3% back down to 2.75% providing that return. Corporate credit spreads, however, are largely unchanged this year. Although the Corporate Bond Index has risen 2% thus far this year, we think that it's going to struggle to return much more over the rest of the year.
We're looking at a couple of different things. One, we do think that interest rates, and specifically long-term interest rates, will end up rising over the long term. We're looking at probably 3.5% to 4.0% being more of a normalized value for the 10-year yield as the Fed continues to taper its asset-purchase program, its quantitative easing program, and really, we're just looking at a more normalized level as far as where Treasuries should trade versus inflation, inflation expectations, and our expectations for gross domestic product growth.
In addition, with the corporate credit spread on average being 117 basis points in our index, that's essentially the lowest level we've seen since the 2008-09 credit crisis. Based on that, we think that the corporate bond market has probably garnered a significant portion of the returns that it's going to get for this year.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals
and individual investors. These products and services are usually sold through
license agreements or subscriptions. Our investment management business generates
asset-based fees, which are calculated as a percentage of assets under management.
We also sell both admissions and sponsorship packages for our investment conferences
and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.