Skip to Content
Credit Insights

High Yield Outperforming Investment Grade, and We Expect That Trend to Continue

Greek drama interesting to watch, but not meaningful to overall picture.

Thus far this year, rising interest rates have led to losses in the investment-grade corporate bond market. For example, through July 10, the Morningstar Corporate Bond Index has declined 0.75%. This decline has mainly been driven by an increase in long-term interest rates, although widening credit spreads have accounted for a portion of the loss. Since the beginning of the year, the yield on the 10-year Treasury bond has risen 25 basis points to 2.42% and the 30-year Treasury has risen 46 basis points to 3.21%.

Typically, increased risk (such as the falling Chinese stock market and ongoing Greek tragedy) normally brings about a flight to safety in the markets; however, investors in the United States are more focused on the increasing probability that the Federal Reserve will begin to raise the federal funds rate later this year. Federal Reserve Chair Janet Yellen reinforced this notion last week during a presentation in which she said she continues to expect the Fed will begin to raise interest rates later this year, albeit at a gradual rate of increase. While she said her stance would be subject to changes in the economic growth rate and inflation expectations, as well as unanticipated developments that could delay or accelerate this first step, she expects that raising rates will be the first step to begin normalizing monetary policy.