As Interest Rates Rise, Investors Prefer Corporate Bonds
Treasury yield curve rises and flattens as probability of December interest rate hike climbs.
The strong demand for corporate bonds continued last week, pushing credit spreads tighter across the investment-grade and high-yield sectors. The average spread of the Morningstar Corporate Bond Index, our proxy for the investment-grade market, tightened 4 basis points to +156 bps over Treasuries. In the high-yield market, the average credit spread in the Bank of America Merrill Lynch High Yield Master Index tightened 6 basis points to end the week at +582 bps.
Until there is some specific catalyst that causes investors to rethink the amount of risk they are willing to undertake, this strong demand for corporate bonds is likely to persist. A confluence of factors has heightened demand for corporates from domestic as well as foreign buyers. Both domestic and foreign buyers are attracted to the credit spread currently offered on corporate bonds. Even though credit spreads have tightened from their recent highs at the end of September, the average credit spreads of investment-grade and high-yield indexes remain higher than their long-term averages.