Bonds Commentary
Previous

Credit – Higher Yields, Heightened Volatility

June 2019

Risk-off delivered during May, with the 10-year U.S. Treasury yield falling 37 basis points during the month to close at 2.14%, its lowest level since September 2017. The Bloomberg Barclays U.S. Treasury Index climbed 2.3% in May on its way to a 4.2% year-to-date return. Credit spreads widened during the month, and at the start of June were back to levels seen in late January. The Bloomberg Barclays U.S. Corporate Index outpaced the U.S. Corporate High Yield Index by 2.6% during the month. Year-to-date through May, the U.S. Corporate Index posted a 7.2% gain, while the U.S. Corporate High Yield Index climbed 7.5%, surpassing the Aggregate Bond Index’s respectable 4.8% return.

With the rally in less-risky bonds in May, emerging market debt surprised to the upside, posting a positive 0.6% return on its way to generating a 6.5% total return year-to-date. Headwinds from trade and relative U.S. dollar strength may hover over emerging markets near-term, but we continue to view emerging market debt as an attractive diversifier for fixed income portfolios, especially given low or even negative sovereign yields in global developed markets, but exposure must be sized appropriately.

While credit spreads exhibited signs of stress during the month, we wouldn’t characterize what took place as a rush to the exits. Broadly speaking, moves across the credit spectrum appeared orderly, and on an absolute basis weren’t dissimilar to what occurred in late January 2018. Investment-grade spreads widened out 20 basis points during May versus 25 basis points in early ’18, while high yield spreads gapped out 72 basis points in the month, versus a smaller, albeit faster 50 basis point jump from January 31 through February 9 of 2018.

Wider credit spreads and higher yields offer greater compensation for taking on credit risk, and with monetary policy accommodative and potentially becoming even more so in the U.S. over the coming quarters, liquidity should remain supportive of credit. However, volatility akin to what we experienced in May will likely remain as anxiety remains high, and should fears of an economic slowdown/recession move closer to reality, pockets of high yield will come under pressure – this provides a good environment for active managers. Yield remains king, and fixed income investors won’t be able to shun investment-grade or high yield credit for long given paltry rates available elsewhere.

Source: Bloomberg, Factset

Next

On a scale from 1 to 5, with 1 being 'Not Good' and 5 being 'Excellent', how would you rate this article?

Press enter to submit your rating

Rate this Article

Use this form to provide additional feedback based on the rating you provided.

Thanks for Rating

Would you like to provide feedback?

Thanks for your feedback!

The content and any portion of this newsletter is for personal use only and may not be reprinted, sold or redistributed without the written consent of Regions Bank. Regions, the Regions logo and other Regions marks are trademarks of Regions Bank. The names and marks of other companies or their services or products may be the trademarks of their owners and are used only to identify such companies or their services or products and not to indicate endorsement or sponsorship of Regions or its services or products. The information and material contained herein is provided solely for general information purposes. Regions does not make any warranty or representation relating to the accuracy, completeness, or timeliness of any information contained in the newsletter and shall not be liable for any damages of any kind relating to such information nor as to the legal, regulatory, financial or tax implications of the matters referred herein. This material is not intended to be investment advice nor is this information intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only current as of the stated date of their issue. Regions Wealth Management is a business group within Regions Bank that provides investment, administrative and trustee services to customers of Regions Bank.

Neither Regions Bank nor Regions Institutional Services (collectively, “Regions”) are registered municipal advisors nor provide advice to municipal entities or obligated persons with respect to municipal financial products or the issuance of municipal securities (including regarding the structure, timing, terms and similar matters concerning municipal financial products or municipal securities issuances) or engage in the solicitation of municipal entities or obligated persons for such services. With respect to this presentation and any other information, materials or communications provided by Regions, (a) Regions is not recommending an action to any municipal entity or obligated person, (b) Regions is not acting as an advisor to any municipal entity or obligated person and does not owe a fiduciary duty pursuant to Section 15B of the Securities Exchange Act of 1934 to any municipal entity or obligated person with respect to such presentation, information, materials or communications, (c) Regions is acting for its own interests, and (d) you should discuss this presentation and any such other information, materials or communications with any and all internal and external advisors and experts that you deem appropriate before acting on this presentation or any such other information, materials or communications.

Employees of Regions Asset Management may have positions in securities or their derivatives that may be mentioned in this report or in their personal accounts. Additionally, affiliated companies may hold positions in the mentioned companies in their portfolios or strategies. The companies mentioned specifically are sample companies, noted for illustrative purposes only. The mention of the companies should not be construed as a recommendation to buy, hold or sell positions in your investment portfolio.

This communication is provided for educational and general marketing purposes only and should not be construed as a recommendation or suggestion as to the advisability of acquiring, holding or disposing of a particular investment, nor should it be construed as a suggestion or indication that the particular investment or investment course of action described herein is appropriate for any specific retirement investor. In providing this communication, Regions is not undertaking to provide impartial investment advice or to give advice in a fiduciary capacity.

*Investment, Annuities and Insurance Products

  • Are Not FDIC Insured
  • Are Not Bank Guaranteed
  • May Lose Value
  • Are Not Deposits
  • Are Not Insured by Any Federal Government Agency
  • Are Not a Condition of Any Banking Activity