27 Aug

Investment-Grade Corporate Bond Yields Fall from Elevated Levels

WRITTEN BY Lynn Noah FEATURED IN Macroeconomic Analysis

Investment-grade bonds

Investment-grade corporate bonds are debt instruments rated BBB- and above by rating major Standard & Poor’s. Other rating agencies have their own scale of rating a corporate bond as investment-grade. Treasuries are also considered investment-grade.

Mutual Funds (or MFs) like the Vanguard Total Bond Market Index Fund (VBMFX) and the Ivy Limited-Term Bond Fund (WLTAX) help you invest in these instruments. VBMFX invests in investment-grade corporate bonds of companies such as American Airlines Group (AAL), Nike (NKE), and General Electric (GE).

Investment-Grade Corporate Bond Yields Fall from Elevated Levels

Yield movement in 2015 so far

According to the BofA Merrill Lynch US Corporate Master Effective Yield, the first four months of 2015 have seen yields on investment-grade corporate bonds falling. There’s been a safe-haven demand for these bonds due to the higher yield they’re providing compared to similarly rated instruments of other developed nations. This has led to a fall in yields.

Yields on investment-grade corporate bonds fell to a low of 2.84% by mid-April. US corporates and financials thronged the primary bond market in the United States due to these low yield levels.

Since the end of April, yields showed some rising trend, although their level remained lower than the 2014 level. But June broke the low-level trend in yields, a trend that continued into July. Yields rose as high as 3.42% on August 18. This was the highest level in 2015 year-to-date, and it was also the highest level since September 18, 2013.

Spreads in 2015

The BofA Merrill Lynch Option-Adjusted Spread (or OAS) measures the average difference in yields between investment-grade bonds and Treasuries. Securities selected for calculating this spread are rated BBB- or higher on the S&P rating scale.

If spreads are rising or widening, credit conditions can be assumed to be worsening. Spreads also widen when growth is slow and economic conditions are worsening. Conversely, falling or tightening spreads coincide with faster growth and better economic conditions.

In 2014, spreads by this measure ranged between 1.06% and 1.51%. Until August 2015, spreads ranged between 1.29% and 1.69%. Spreads fell as the year progressed except in May, June, and July.

The OAS averaged 1.50% in January 2015. The average fell to 1.43% in February, to 1.35% in March, and to 1.33% in April. In May 2015, spreads averaged 1.34%. In June, they averaged 1.42%, and in July, the average was 1.51%. August 21 recorded a spread of 1.69%, the highest since June 27, 2013. Spreads are up 25 basis points compared to the end of December 2014.

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