Corporate Credit Spreads Hold Steady in the Face of Rising Interest Rates
Weak retail sales report calls expected economic rebound into question.
After steadily rising over the previous three weeks, the yield on the 10-year Treasury peaked at 2.28% Wednesday before rebounding and ending the week at 2.14%. As interest rates rose, corporate bonds have given back a significant amount of the gains they generated earlier this year. In mid-April, the year-to-date return of the Morningstar Corporate Bond Index had risen to 3.08%; however, rising interest rates have erased much of that gain, pushing bond prices down so much that as of May 15, the index has risen only 1.14% for the year. Comparatively, the Morningstar US Government Bond Index has risen only 0.65% year to date. With their lower correlation to underlying interest rates, high-yield bonds have held their value better over the past month. The Bank of America High Yield Master Index has risen 3.91% year to date, giving up only a small portion of its earlier gains after being up as much as 3.95% in April.
During the 2013 "taper tantrum," when interest rates rose precipitously after then-Chairman Ben Bernanke indicated that the Federal Reserve was nearing the time it would halt its asset-purchase program, corporate credit spreads widened significantly as portfolio managers attempted to dodge falling bond prices; however, over the past month as interest rates have risen, corporate credit spreads have traded in a very narrow range of only 4 basis points. As of May 15, the average spread of the Morningstar Corporate Bond Index is +134 basis points over Treasuries, compared with +131 in mid-April. In the high-yield market, the Bank of America Merrill Lynch High Yield Index ended the week at +455, only 2 basis points tighter than mid-April.