International Financials Dominate US High-Grade Bond Issuance (Part 2 of 5)
(Continued from Part 1)
Yields
When we talk about investment-grade bonds, we’re essentially referring to their credit rating. These bonds are rated BBB- and above by Standard & Poor’s. ETFs like the iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD) invest in the investment-grade corporate bonds of companies like ConocoPhillips (COP), General Electric (GE), and Apple (AAPL).
Investment-grade issuers have thronged the primary market in 2015, and March has been no exception. Favorable interest rates have been the primary driver of high issuance. Low Treasury yields (TLT) had made issuing corporate bonds attractive earlier in the year, as high-grade corporates could issue debt at rates that were cheaper than in 2014. Now, with a rate hike looming sometime in 2015, issuers are coming to the market to take advantage of low rates, as an eventual hike may push prevailing yields up. If this happens, investors would ask for higher yields from corporates, which would make raising debt more expensive.
In 2014, yields touched a high of 3.33%, according to the Bank of America Merrill Lynch US Corporate Master Effective Yield. So far in 2015, the highest yield the indicator has seen was 3.18% on January 2. From March 1 to March 27, 2015, yields ranged between 2.91% and 3.14%. Yields were generally higher in the week to March 20, as investors remained wary of entering the market due to the Federal Reserve’s monetary policy statement. Last week, yields remained generally lower.
Spreads
The Bank of America 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,” the spread considers only debt issues that are rated BBB- or higher.
Credit conditions worsen when these spreads widen. They’re also associated with slower growth and generally worse 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 had ranged between 1.06% and 1.51%. Until March 27, 2015, spreads have ranged between 1.29% and 1.53%. This trend was primarily because of a fall in Treasury yields. 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 so far for what’s been reported, it further reduced at 1.34%, though it’s marginally higher than the previous week. Spreads are down six basis points from the end of December 2014.
Continue to Part 3
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