US Financial Companies Return to the Investment-Grade Market (Part 2 of 5)
(Continued from Part 1)
Yields
Investment-grade bonds are debt instruments that are rated BBB- and above by Standard & Poor’s, as well as similar ratings by different credit rating agencies. ETFs like the iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD) invest in investment-grade corporate bonds of companies like ConocoPhillips (COP), General Electric (GE), and Apple (AAPL).
In January 2015, Treasury yields (TLT) had fallen due to buying interest by international investors who had found Treasury yields attractive when compared with sovereign yields in other developed countries. This drove down yields in the corporate bond market as well, which helped the primary market issuance.
In April so far, like March, fixed income markets have tracked economic releases closely to gauge how long the Fed may wait before raising interest rates. Indicators like non-farm payrolls, inflation, and consumer spending have received special focus, due to their close relationship in determining the strength and readiness of the economy for a rate hike.
In 2014, yields had touched a high of 3.33%, according to the BofA Merrill Lynch US Corporate Master Effective Yield. So far in 2015, the highest yield seen by the indicator has been 3.18% on January 2. Until April 17, 2015, yields ranged between 2.89%–3.14%. In the last week, yields touched a low of 2.84%—the lowest in 2015 so far. This movement was primarily due to less-than-encouraging economic reports, which may indicate a later, rather than sooner, rate hike.
Spreads
The BofA Merrill Lynch Option-Adjusted Spread (or OAS) measures the average difference in yields between investment-grade bonds and Treasuries. To remain consistent with the definition of investment-grade corporate bonds, it considers only those debt issues that are rated BBB- or higher on the rating scale.
Worsening credit conditions can be seen when these spreads widen. They are also associated with slower growth and generally worsening economic conditions. On the other hand, low or tight spreads coincide with faster growth and generally better economic conditions.
In 2014, spreads by this measure ranged between 1.06%–1.51%. Until April 17, 2015, spreads have ranged between 1.29%–1.53%. Spreads have fallen as the year has progressed. The OAS had averaged 1.50% in January 2015.
The average fell to 1.43% in February and in March, it further fell to 1.35%, although it increased marginally as the month progressed. So far in April 2015, spreads have averaged 1.34%. Further, spreads are down 11 basis points from the level seen at the end of December 2014.
Continue to Part 3
Browse this series on Market Realist: