A Tale of Two Bond Markets
Investment grade struggles while high yield strengthens.
It's been a tale of two corporate bond markets thus far this year. Year to date, the Morningstar Corporate Bond Index (our proxy for the investment-grade market) has lost 3.14%, whereas the BofA Merrill Lynch High Yield Master Index has risen 0.66%. Since the beginning of the year, credit spreads have widened 24 basis points in the investment-grade market but tightened 30 basis points in the high-yield market. The average credit spread in the investment-grade market remains near its widest level thus far this year and is as high as it was this time last year. In contrast, the average credit spread of the high-yield index has rallied to its tightest level since before the 2008-09 credit crisis. To put into context just how tight spreads in the high-yield market are, since the beginning of 2000, the high-yield index has traded below the current level less than 9% of the time. Compounding the loss in the investment-grade market, with its longer duration, the investment-grade bond index is more sensitive to rising interest rates than the high-yield index. Since the end of last year, interest rates have risen significantly as the 2-year, 5-year, 10-year, and 30-year bonds have risen 67, 59, 51, and 31 basis points, respectively.