Corporate Bonds' Strong Performance Continued in August

Dave Sekera: As is typical in August, new-issue volumes and trading activity in the secondary market slowed down markedly as many market participants took time off during the month. However, even though activity was light, corporate credit spreads continued to tighten in both the investment-grade and high-yield space.

Since the end of July, the average spread of the Morningstar Corporate Bond Index has tightened 8 basis points to a spread of 137 on Sept. 6, and the average spread of the Bank of America Merrill Lynch High Yield Index has tightened 52 basis points to 509. These credit-spread levels mark the tightest levels that these indices have registered since mid-2015.

Year-to-date, corporate bonds have generated strong returns based on a combination of tightening credit spreads and declining interest rates. Through Sept. 6, the Morningstar Corporate Bond Index has risen 9.33%, and the Bank of America Merrill Lynch High Yield Master Index has risen 14.83%. Since the end of last year, investment-grade corporate bond spreads have tightened a total of 31 basis points, and high-yield spreads have tightened 186 basis points. Over the same time period, the yield on five-, 10-, and 30-year Treasury bonds have declined by 64, 73, and 78 basis points, respectively, to levels that are near their lowest historical interest rates ever. Yet, while interest rates have fallen back toward their lowest historical levels, they remain much higher than the yields on developed-market sovereign bonds. For example, while the U.S. 10-year Treasury bond yields 1.54%, comparatively, Germany's 10-year bond currently yields a negative 0.12%, Japan's 10-year bond yields a negative 0.05%, and Switzerland's 10-year bond currently trades at negative 0.50%.