Credit market performance vs. 10-year Treasury yield
Source: ICE BofAML U.S. Corporate Index, ICE BofAML U.S. High Yield Index, S&P/LSTA Leveraged Loan Index, as of February 25, 2021.
- Fed Chair Powell assured investors in his testimony this week that short-term rates would remain static until the U.S. economy has made “substantial further progress” toward the Fed’s employment and inflation goals. He added that achieving these goals could “likely to take some time.”1 Against this backdrop, the 2-year U.S. Treasury yield has remained anchored near historical lows of approximately 0.10%–0.15%.
- Long-term rates, which the Fed generally has less control over, have been a very different story. The 10-year U.S. Treasury yield rose steadily through the second half of 2020 but has moved sharply higher since January — including a 17 bps jump this week.2
- Rates’ rapid rise has once again shined a spotlight on duration, which measures the sensitivity of a bond’s price to changes in interest rates. The chart compares monthly returns for investment grade bonds, whose duration has gradually risen in recent years as yields have fallen, to high yield bonds and senior secured loans, both of which feature significantly lower stated durations than their investment grade peers.
- As the chart highlights, investment grade bonds have seen negative performance in five of the past nine months and returned -0.16% overall during that time. In that same time frame, high yield bonds have experienced one negative month and senior secured loans none, returning 13.25% and 10.74%, respectively.3
- Interest rates, of course, are not the full story. The high yield bond and senior secured loan markets are generally more sensitive to economic conditions, company fundamentals and investor sentiment, which have all generally been positive this year. The Barclays Agg’s negative return over the past nine months, however, shines a harsh spotlight on the impact that rising interest rates may have on longer-duration fixed income investments.