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High-Yield Bonds Poised to Outperform in 2015

With falling interest rates behind us, we expect the high-yield market will outperform the investment-grade market, even if we see some energy-sector defaults.

This video transcript has been corrected to reflect the current long-term Treasury rates. The yield on the 10-year and 30-year bonds are currently around 2% and 2.6%, respectively. 

Dave Sekera:  Investment-grade corporate bonds performed strongly in 2014.  The Morningstar Corporate Bond Index, which is our proxy for the investment-grade corporate bond market in general, rose 7.2% last year.  Much of this outperformance was due to the decline in long-term interest rates.  So, for example, the 10-year Treasury bond declined by 86 basis points and the 30-year Treasury bond declined by over 120 basis points.  Currently, the 10-year is at about 2% and the 30-year is at about 2.6%.  Offsetting some of the benefit of lower interest rates, corporate credit spreads did widen in 2014.  For example, in the investment-grade sector, within our index, credit spreads widened about 20 basis points and ended the year at 140 basis points over Treasuries.