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Credit Insights

Flight to High-Quality Corporate Bonds

It's hard to argue against owning Microsoft bonds at a spread over Treasuries.

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Despite the shenanigans in Washington (or more likely because of them), buyers snapped up single A or better paper last week. Investors sought after the highest-rated issuers, such as  Wal-Mart  (WMT) (rating: AA),  Microsoft (MSFT) (rating: AAA), and  Johnson & Johnson (JNJ) (rating: AAA). Early in the week, there was market chatter that Chinese investors were out buying the most highly rated bonds, and the speculation was that those accounts were reallocating from other asset classes such as agencies and Treasuries. Insurance companies were also out in force, searching along the entire yield curve for highly rated issuers.

Indicative of this demand, the corporate bond spread for the Morningstar Corporate Bond Index tightened by 5 basis points last week to +154 and the AA rated component was the best-performing rating segment. The long end of the Treasury curve rallied strongly, as both the 10-year and 30-year tightened about 20 basis points to end the week at 2.80% and 4.13%, respectively. Half of the gains came at the beginning of the week, and the other half occurred Friday after the horrible second-quarter gross domestic product number was released.

David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.