April 23, 2024

Notes from the Desk: Corporate Bonds are Resilient


Bond yields continued to rise last week as markets digested rising inflation expectations and the prospect of increased Treasury issuance. The yield curve rose in near-coincidence, with 2-year and 10-year yields rising 10 basis points to 4.99% and 4.62%, respectively. The 30-year yield rose 9 basis points to end the week at 4.71%.

We believe a potential catalyst for the US bond market will be the Treasury's Quarterly Borrowing Announcement (QRA) scheduled for next Wednesday, May 1st. Fiscal uncertainty has been a major driver for the market due to the huge government spending since COVID-19. In its last QRA on January 31st, the Treasury increased the coupon bond issuance and stated that “based on its current borrowing needs projections, the Treasury does not expect to need to increase the size of its nominal coupon bond or FRN auctions beyond those announced today, at least for the next several quarters.” Attention will be focused next week on whether the Treasury will change the coupon bond profile.

Since January 31, the reassessment of Fed expectations, along with increased coupon bond issuance, have undoubtedly contributed to the rise in yields and term premiums.

The past few weeks have seen the first true “risk-off” trend of the year, with the S&P 500 dropping 3% last week, the index's biggest drop since the Silicon Valley banking crisis in March 2023. However, corporate credit spreads have remained quite stable, with investment-grade spreads widening by just 3 basis points over the week and high-yield spreads increasing by 13 basis points. Corporate headline yields have contributed to stable demand and resilience for companies, which will continue until a downside surprise in growth and earnings data significantly weakens fundamentals. The chart below shows the relative yields of investment-grade corporate bonds and equity earnings, illustrating the continued demand for bonds amid rising equity volatility.

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