Corporate Bond Yields Are Still below the Levels in December 2014

Issuance Slowed for Investment-Grade Corporate Bonds (Part 2 of 5)

(Continued from Part 1)

Yields

Investment-grade bonds are rated BBB- and above by Standard & Poor’s. ETFs—like the iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD)—invest in companies’ investment-grade corporate debt issues like ConocoPhillips (COP), General Electric (GE), and Apple (AAPL).

High-grade bonds are considered relatively safe when financial markets’ volatility is rising. They have better repayment credentials. Volatility is measured by the Volatility Index (VIX). It’s tracked by ETFs like the iPath S&P 500 VIX Short Term Futures ETN (VXX). For 2014, VXX was down 26%. LQD returned 8.2%. Until March 20 this year, VXX fell 18.3%. LQD is up 1.7%.

So far, favorable interest rates led high-grade corporate issuers to throng the market in 2015. Treasury yields were battered in January 2015—compared to December 2014. Yields on high-grade bonds also came down. The low yielding Treasuries also made issuing corporate bonds attractive. High-grade corporates could issue debt at rates that were cheaper than in December.

Yield on the 30-year maturity Treasury bond fell to a low of 2.25% in the secondary market on January 30, 2015—the lowest so far in the year. On the same day, the yield on the ten-year Treasury security fell to 1.68%. This was also the lowest, so far, in 2015.

Meanwhile, the BofA Merrill Lynch US Corporate Master Effective Yield stood at 2.88% on the same day. So far, the effective yield, according to this measure, was 2.88%–3.18% in 2015 for the week ending March 20. However, yields are down by 25 basis points from the level at the end of December 2014.

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, by this measure, spreads were 1.06%–1.51%. Until March 20, 2015, spreads were 1.29%–1.53%. This was mainly due to a fall in Treasury yields. Spreads fell as the year progressed. The OAS averaged 1.50% in January 2015. The average fell to 1.43% in February. So far, in March it reduced to 1.33%. However, it’s marginally higher than the previous week. Spreads are down six basis points from the level at the end of December 2014.

Continue to Part 3

Browse this series on Market Realist:

• Part 1 - Why Did Corporate Bond Yields Fall?

• Part 3 - High-Grade Corporate Bonds Had the Third Lowest Issuance in 2015

• Part 4 - EMD Finance’s Yankee Corporate Issue Is the Largest in 2015