NEW YORK (Reuters) – U.S. corporate bonds posted their first positive monthly return this year in May as easing inflationary jitters eased pressure on rates and the possibility of a less hawkish Federal Reserve alleviating concerns about companies’ ability to repay debt.
Total returns as measured by the ICE BofA U.S. Corporate Index, which tracks high-quality dollar-denominated corporate debt, were 0.55% in May, according to Refinitiv data — the first positive figure since November.
Total returns for the ICE BofA US High Yield Index, a commonly used benchmark for the junk bond market, were 0.27%, the first positive monthly return since December.
Total returns include interest payments and price changes.
Bonds have come under fire this year as the US Federal Reserve has become increasingly determined to tighten monetary policy to combat relentless inflation.
But U.S. government bond yields fell in May and market inflation expectations eased, with investors now believing fewer rate hikes may be needed and some believing the central bank will likely pause tightening in september.
“A lot of that performance, certainly in the higher quality corporate market, is coming from lower interest rates generally,” said Steven Abrahams, senior managing director at Amherst Pierpont Securities.
On Tuesday, benchmark 10-year Treasury yields were some 10 basis points lower than at the end of April, after a volatile month in which they hit a multi-year high of 3.2% before falling sharply.
To further contribute to returns, investment grade bond spreads – the interest rate premium demanded by investors to hold corporate debt over safer US Treasuries – held steady in May at around 140. basis points, after widening by 17 basis points in April.
The duration of high-yield bonds — or their sensitivity to changes in interest rates — is half that of their investment-grade counterparts, which is why monthly yields, while positive, were lower, Abrahams said.
On a monthly basis, high yield spreads widened by around 30 basis points, but last week fell more than 70 basis points from a high of 494 basis points – the highest since November 2020.
“Sentiment has definitely improved on spreads,” said Ryan O’Malley, portfolio manager at Sage Advisory, adding that some high-yielding sectors in the space, such as energy, were helping performance. the global asset class.
(Reporting by Davide Barbuscia; Editing by Kirsten Donovan)
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