High Yield Still Poised to Outperform
We continue to expect that high-yield bonds will provide better returns than investment-grade as underlying rates tick up and moderate economic growth holds down defaults.
Dave Sekera: In April, most fixed-income asset classes gave back some of the gains they generated earlier this year as underlying interest rates have risen. The Morningstar Core Bond Index, our broadest measure of the fixed-income universe, declined 38 basis points last month and is now only up a little under 1% thus far this year. The Morningstar Corporate Bond Index, which is our proxy for the investment-grade sector, lost 0.5% last month and is now only up about 1%, year to date.
However, in the high-yield sector, the BofA Merrill Lynch US High Yield Index rose 1.2% in April and has gained 3.8% thus far this year. The gain was driven by tightening credit spreads as the average credit spread of the index itself tightened about 56 basis points to 448 basis points over Treasuries. A significant portion of the tightening has occurred in the energy sector as oil prices recovered from their lows earlier this year. The average spread in the energy sector tightened 130 basis points and currently stands at 623.