6/11/2023 0 Comments 10 year bond market watch![]() This strong economic growth will continue to bolster corporate balance sheets and should lead to more credit rating upgrades than downgrades the resulting default rate will remain low. However, credit spreads are tight for a reason.Īlthough the delta variant of the novel coronavirus delayed the economic normalization that we expected in the second half of 2021, we forecast that momentum from the ongoing economic rebound will result in several years of above-average economic growth. In fact, credit spreads are trading within their lowest quintile over the past 20 years. The positive return is based on the combination of its higher yields and tightening credit spreads, which were only partially offset by rising interest rates, as the duration of this index is only 4.2.Īs the economy has normalized over the past 18 months and default risk has declined, corporate credit spreads have narrowed significantly since the emergence of the pandemic. In the junk-bond market, the Morningstar High Yield Index has risen by 4.40%. Treasury indexes at 6.6 and 7.3, respectively. ![]() The duration of our corporate bond index is 8.7 as compared with the Core and U.S. The outperformance appears even better when you realize that the average maturity of the Corporate Bond Index is even longer than the Core Bond and U.S. corporate bond market, has lost only 1.32% thus far this year. The Morningstar Corporate Bond Index, our proxy for the U.S. Given the extra yield provided by the credit spread on corporate bonds, both investment-grade and high-yield bonds have outperformed on both an absolute and duration-adjusted basis. Treasury Bond Index has performed even more poorly and has lost 2.33%. With its longer duration-a measure of interest-rate sensitivity-the Morningstar U.S. fixed-income market, has declined 1.71% through Dec. The Morningstar Core Bond Index, our broadest measure of the U.S. Treasury bond has risen 54 basis points to 0.67% among intermediate bonds, the five-year has increased 89 basis points to 1.25% and at the long end of the spectrum, the 10-year has increased 55 basis points to 1.48%, and the 30-year has risen 23 basis points to 1.88%. Among shorter-term maturities, the interest rate on the two-year U.S. The amount that bond prices have fallen this year because of rising rates has more than offset the amount of interest earned. But from here, we expect that medium-term bonds will provide the most yield with less price sensitivity from changes in interest rates as compared with longer-dated bonds.įixed-income markets have generally performed poorly thus far this year because of the increase in interest rates. Over the course of this past year, interest rates have risen the most among intermediate maturity bonds. Within the corporate bond market, investors can benefit from one of 2021’s trends. Treasury yielding approximately 1.50%, the yield on the average BBB rated corporate bond is almost double at 2.60%. Considering how low interest rates are, this extra credit spread provides a significant amount of extra yield for investors. Treasuries to provide extra compensation to investors to offset the credit risk of the corporate issuers. Here’s why: Corporate bonds trade at a higher yield-known as a spread-over comparable maturity U.S. So, as rates rise and push bond prices down, how can investors position their fixed-income allocations to minimize the impact of rising rates?Īcross the spectrum of fixed-income securities, we expect medium-term corporate bonds will outperform the broader bond market.
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