Corporate bonds

US corporate bonds post second-worst quarterly loss in history. Why not everything is bad

It’s been a weird and wild three months in financial markets, culminating in the worst quarterly loss for most of the $10.6 trillion U.S. corporate bond market since the 2008 global financial crisis.

The investment grade tracking ICE BofA US Corporate Index on Wednesday recorded a negative total return of -4.495% for the first quarter of 2021.

It marked the three most lost months for the benchmark since its historic loss of 7.49% in the third quarter of 2008, during the global financial crisis, according to analysts led by Hans Mikkelsen of BofA Global Research, who have reported the impending milestone earlier in the week.

Worst loss for investment grade corporate bonds since 2008.

BofA Global Search

Mikkelsen’s team noted that the index’s latest quarterly loss surpassed the negative 4.05% return experienced during the liquidity crisis that erupted in the first quarter of 2020 at the onset of the coronavirus pandemic in the United States. United.

It also topped the 3.36% loss recorded in the second quarter of 2013 following the “Taper Tantrum,” a volatile period sparked by then-Federal Reserve Chairman Ben Bernanke, who in late June the same year, said the central bank planned to cancel its bond-buying program later in the year.

But bond market pros said the recent tough time for corporate bonds doesn’t necessarily mean red flags for the market.

“You can see those lower returns when things are going well,” Collin Martin, fixed income strategist at the Schwab Center for Financial Research, told MarketWatch. “I’m not panicking too much, because the outlook is positive.”

Martin pointed to the 10-year Treasury yield TMUBMUSD10Y,
hitting a one-year high of 1.749% on Wednesday as a catalyst for the difficult quarter, but suggested the surge in yields serves less as a warning shot than a nod to the economy’s continued recovery after the worst public health emergency in a century, and that “we are getting closer to emerging from the pandemic”.

The benchmark Treasury yield rose about 1.24% from an all-time low of 0.514% in August, according to Dow Jones Market Data.

“Fifty basis points on the 10-year Treasury might have made sense when half the world was closed and we didn’t know what the future looked like,” Martin said.

But even with rising benchmark rates, he still thinks it’s a “borrowers’ market”, with overall returns hovering near historic lows.

Corporate bonds are listed to a spread, or premium, above the Treasury’s risk-free rate, which aims to compensate investors for the added risk of a company’s potential default.

“It’s interesting because credit spreads are tighter now than at the start of the year,” said John Luke Tyner, fixed income analyst at Aptus Capital Advisors. “All the pain came from interest rate risk.”

Tyner said many companies this year “saw the writing on the wall” and decided to lock in borrowing costs on the expectation that benchmark yields would continue to rise from lows.

The yield on the ICE BofA US Company Index was last spotted at 2.28%, down from a pandemic high of around 3.68% a year ago.

The industry’s popular exchange-traded fund, the iShares iBoxx $ Investment Grade Corporate Bond ETF
was down 5.9% year-to-date, according to FactSet.

“Looking ahead, I’m a little nervous,” Tyner said, adding that “the rate risk is really high, but you really don’t get anything in terms of credit risk.”

Sunny Oh contributed reporting.