Chart of the week

Investment grade bonds vulnerable as rates rise

As rising rates have wreaked havoc across markets this year, our chart focuses on the widening duration gap between IG and HY bonds.

January 21, 2022 | 2 minute read

Duration comparison: Investment grade vs. high yield

Source: Bloomberg Finance, L.P., for the period from January 2001 to December 2021. Investment grade represented by the ICE BofAML U.S. Corporate Index. High yield represented by the ICE BofAML High Yield Master II Index.

  • Rising interest rates and a cloudier economic outlook have wreaked havoc on investors this year as equity and fixed income markets have sold off in unison in January.
  • Selling activity in the equity markets has been focused on high-multiple growth stocks while traditional, core fixed income has borne the brunt of the fixed income decline. 
  • Year to date, the Agg has returned -2.07% and investment grade corporate bonds have returned -2.61%.1 That a sharp increase in interest rates would hurt fixed income returns should not surprise investors as bond prices decline when interest rates rise. 
  • It is notable, however, that investment grade bonds have become increasingly vulnerable to rising rates as their duration has drifted steadily higher. As the chart shows, the stated duration on investment grade corporate bonds has risen from 5.7 years in 2000 to 8.3 years as of December 2021.2 Over the same time, high yield’s duration has remained relatively stable, hovering around 5.0 years. (Read about high yield’s negative empirical, or observed, duration here.)
  • As investors prepare for impending Fed rate hikes and the potential for rates to rise further, they may consider revisiting the interest rate risk inherent across both their equity and fixed income portfolios. 

  • As of January 20, 2021. The Agg refers to the Bloomberg U.S. Aggregate Bond Index.

  • Bloomberg Finance, L.P., for the period from January 2001 to December 2021. Investment grade represented by the ICE BofAML U.S. Corporate Index. High yield represented by the ICE BofAML High Yield Master II Index.

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