Investment-Grade Corporates Return after a Lackluster Week (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 investment-grade corporate bonds of companies like ConocoPhillips (COP), General Electric (GE), and Apple (AAPL).
In January 2015, Treasury yields (TLT) were still low. This was due to international investors buying interest. They found Treasury yields attractive—compared to sovereign yields in other developed countries. This drove down yields in the corporate bond market as well. It helped primary market issuance.
In March 2015, economic indicators were the primary yield drivers, especially after the Federal Reserve announced its stance on monetary policy on March 18. So far, in April, economic indicators continued to dictate yield movement.
In 2014, yields 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 was 3.18% on January 2. Until April 10, 2015, yields were 2.89%–3.14%.
Spreads
The BofA Merrill Lynch OAS (option-adjusted spread) measures the average difference in yields between investment-grade bonds and Treasuries. To remain consistent with the definition of investment-grade corporate bonds, it only considers the debt issues that are rated BBB- or higher on the rating scale.
Worsening credit conditions can be seen when these spreads widen. They’re also associated with slower growth and generally worse economic conditions. In contrast, low or tight spreads coincide with faster growth and generally better economic conditions.
In 2014, spreads by this measure were 1.06%–1.51%. Until April 10, 2015, spreads were 1.29%–1.53%. This was primarily due to a fall in Treasury yields. Spreads have fallen as the year progressed. The OAS averaged 1.50% in January 2015. The average fell to 1.43% in February. In March, it fell to 1.35%—although, it increased marginally as the month progressed. So far, in April 2015, the spread averaged 1.35%. Also, spreads are down 12 basis points from the level at the end of December 2014.
Continue to Part 3
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