Corporate bonds

Investment grade corporate bonds head for 5th worst monthly return on record

Debt sold by the biggest companies stumbled at the start of 2022, with most of the nearly $11 trillion U.S. corporate bond market poised for its fifth-worst monthly return on record.

Investment grade corporate bonds, debt issued by many leading S&P 500 SPXs,
+1.89%
companies, were heading for a 3.1% loss on a total return basis in January, putting the sector on pace for its fifth-worst monthly performance on record (see chart), according to CreditSights.

January 2022 ranks among the 5 worst months for US investment grade bonds

CreditSights

The worst months from a total return perspective were March 2020, when credit markets tumbled at the start of the pandemic, two months during the 2008 global financial crisis, and July 2003, according to CreditSights.

In particular, each of these months — with the exception of September 2008 when Lehman Brothers went bankrupt — were followed by monthly increases in performance (see chart).

“HY’s performance is marginally better, ranking the 16th worst month since January 1997,” Winnie Cisar, global head of strategy at CreditSights, wrote in a Monday note, referring to high-yielding HYG,
+0.02%
or “junk bond” JNK,
-0.01%
sector.

Corporate bonds are valued at a spread, or premium, above the relevant Treasury rate TMUBMUSD10Y,
1.778%
to help offset the risk of default. Rate volatility is also impacting bond performance, particularly with the 10-year Treasury yield climbing more than 25 basis points in January to around 1.79% on Monday.

With that, Cisar does not expect a significant spread hike for February, given relatively small spread movements to start 2022, the “continued rotation of fixed rate asset classes” by investors and expectations of a rate hike in March.

“However, using history as a guide indicates that the month ahead may be less challenging from a rate perspective.”

Markets have been in turmoil as Wall Street tries to adjust to a future of tighter financial conditions, with the Federal Reserve looking to raise rates soon and shrink its balance sheet by nearly $9 trillion to combat the inflation recently pegged at nearly 40 years.

See: What to expect from the markets over the next six weeks, before the Federal Reserve revamps its easy money policy

The largest exchange-traded investment grade corporate bond fund in the United States, LQD,
+0.05%
was down around 3.7% on the year, when last checked on Monday, while the rate-sensitive Nasdaq Composite COMP
+3.41%
was 10% lower. The S&P 500 SPX,
+1.89%
was down about 6% on the year, while the Dow Jones Industrial Average DJIA,
+1.17%
was down about 4% in January.

Related: Fed’s George calls for sharp reduction in balance sheet size of $8.9 trillion