Chart of the week

Rising rates put the “40” to the test

As rates move higher, we look at fixed income performance amid rising rate environments, highlighting sub-investment grade’s strong relative returns.

November 13, 2020 | 2 minute read

Fixed income returns amid rising rate environments

Source: Data as of November 12, 2020. Barclays Agg refers to the Bloomberg Barclays U.S. Aggregate Bond Index. High yield bonds represented by ICE BofAML U.S. High Yield Index. Senior secured loans represented by S&P/LSTA Leveraged Loan Index.

  • Monday’s news of potentially significant developments in the race for a COVID-19 vaccine quickly adjusted the market’s dynamics. U.S. stocks resumed their post-election bounce and the 10-year U.S. Treasury yield jumped, nearly breaching the 1% mark.1
  • The 10-year yield of course remains very low on a historical basis, but it bears watching as it has been inching toward doubling its historical low of approximately 0.51% seen in early August.1 The increasing potential for a COVID-19 vaccine also could propel Treasury yields higher on a more sustained basis.
  • Against this backdrop, the chart looks at fixed income returns during periods of rising interest rates. Each period since 1994 saw relatively modest increases as they occurred within a broader, 40-year secular decline in interest rates. Yet traditional bonds fared poorly in each case, turning in negative returns in five out of the six instances shown.2
  • Meanwhile, high yield bonds and senior secured loans, which are generally more reactive to company-specific fundamentals and macroeconomic conditions than interest rates, performed notably better during historical periods of rising rates.
  • In an environment like today’s, high yield bonds or senior secured loans may be particularly attractive to investors looking to reduce or diversify their interest rate risk.

  • Federal Reserve Bank of St. Louis, As of November 12, 2020

  • Bloomberg Barclays U.S. Aggregate Bond Index, ICE BofAML U.S. High Yield Index, S&P/LSTA Leveraged Loan Index.

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