The corporate bond market has posted a loss of more than 7% so far this year, its worst quarterly performance since 1980. That doesn’t mean investors are betting a recession is coming.
While a lot of attention was paid to the liquidation of Treasuries, the corporate debt market performed less well. The Treasury market as a whole has lost 5.6% so far this year, while the investment-grade bond market has fallen 7.7%, according to ICE indices. Two major exchange-traded funds that track these markets, the
iShares U.S. Treasury Bonds
ETF (ticker: GOVT) and the
iShares iBoxx $ Investment Grade Corporate Bonds
ETF (LQD) — lost 7.9% and 10% respectively.
One of the main reasons for the underperformance of highly rated corporate bonds is the duration of the market, or its sensitivity to interest rates. Bonds with long maturities and low coupons generally have greater duration, or sensitivity to interest rates. The investment grade bond market has a duration of 7.7 years while the Treasury market has a duration of 6.9 years. (There are several reasons for this, including the relative popularity of treasury bills versus short-term corporate paper.)
Of course, duration is not the only reason why highly rated corporate bonds underperform. It is also true that investors are demanding more compensation for the risk of default than they were at the start of this year.
But investors aren’t asking for a premium high enough to suggest they’re worried about an impending recession. Investment-grade bonds yield 1.2 percentage points more than Treasuries. And even at its recent high of 1.5 percentage points, the market spread on Treasuries hasn’t even come close to 2020 levels, or even its 2.2 point spread from its worst. from the sale of raw materials at the beginning of 2016.
The riskiest bonds don’t offer such a yield premium either, offering 3.5 percentage points more than Treasuries. That’s well below the 11 percentage point gap at the start of the Covid-19 selloff and its widest gap of 8.9 points in 2016.
In theory, publicly traded companies should suffer the most from a recession and perform the worst. But the high yield bond market outperformed both the investment grade and treasury bond markets, losing 4.5%. the
iShares iBoxx $ High Yield Corporate Bond ETF
(HYG) has lost just over 6% since the start of the year.
So while fixed-rate bond markets are causing real pain for investors – and losses that are unlikely to stop any time soon – they are not yet showing signs of a recession that will hit risky assets in the near future. . This should provide some relief to investors as safe-haven markets are hit hard.
Write to Alexandra Scaggs at [email protected]