Bonds Commentary

Don’t Stress, Credit Isn’t - Yet

April 2019

On the heels of a dovish about-face out of the FOMC and some less than encouraging economic data, broadly speaking, yields in the 2 to 10-year portion of the Treasury yield curve descended at breakneck speed almost daily from the beginning of March through month-end. The 2-year yield fell 25 basis points during the month while the 10-year declined 22 basis points, boosting returns for investors willing to take on interest rate risk (duration) at the end of February. The rally in Treasuries propelled the Bloomberg Barclays U.S. Aggregate Bond Index to a 1.9% return during March, and a 2.9% return year-to-date. While bonds with safe-haven characteristics, i.e. Treasuries, have rallied sharply, one might have expected riskier bonds to be a source of funds as economic growth expectations have been lowered, but that has been far from the case.

At the index level, credit spreads for both investment-grade and high yield corporate bonds remained steady throughout the latest bout of economic uncertainty and recession talk. The option adjusted spread (OAS), or required compensation for taking on credit risk, for the Bloomberg Barclays U.S. Corporate Index over the Treasury curve collapsed down to 119 basis points at the end of March from 153 basis points at the end of December, generating a 5.1% return during the first quarter of 2019. The Bloomberg Barclays U.S. Corporate High Yield Index has fared even better, with that particular Index’s OAS dropping from 526 basis points to start the year down to 391 basis points to close March – all told generating a 7.2% return during the quarter. While we just threw out a whole bunch of numbers, all of which likely mean little without being placed in proper context, simply put, spread compression across the credit spectrum has failed to confirm more Draconian views of the global economic backdrop being espoused by some due to the inversion of the yield curve between 3-month and 10-year instruments.

Credit spreads can be an early warning sign of impending economic and equity market stress, often blowing out at the slightest hint that corporations may not be able to meet debt repayment obligations - but few such signs exist right now. While the economic backdrop may appear to be less than ideal at the present time, corporate credit spreads lead us to the conclusion that liquidity is ample, financial conditions are supportive, and investor appetite and demand for riskier bonds remains strong. With Treasury yields trending lower into month-end and credit spreads stable, it’s difficult to find significant value in bond-land at the moment. We favor emerging markets debt, both U.S. dollar denominated and in local currency, for diversification and its higher expected total return. Selectivity across asset-backed bonds, specifically MBS and ABS, is more crucial now than coming into 2019 as the sharp move lower in interest rates raises the probability that a many securities issued within the past couple of years are refinanced, with investors scrambling and moving out on the risk spectrum to find comparable yields. With the recent rally in high yield bonds, we find ourselves closer to the exit, with a decision on trimming or eliminating our position there a possibility over the coming months.

Source: Bloomberg, Factset


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. Re¬gions, 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