If you wish to invest in investment-grade corporate bonds, ETFs like the iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD) help you do that. This ETF invests in investment-grade corporate bonds of companies like Goldman Sachs (GS), General Electric (GE), and Wal-Mart (WMT). But what are these bonds? Investment-grade corporate bonds are those debt instruments that are rated BBB- and above by Standard & Poor’s. Other rating agencies have their own scale of rating a corporate bond as investment-grade.
For nearly a month, yields on European bonds have increased. This rise has been led by German bunds. Yield on the ten-year German sovereign bond has risen 55 bps (basis points) in the past one month, while that on the 30-year security has risen 78 bps. This sell-off has reduced international investors’ attraction to US Treasuries (TLT).
These investors were attracted to US sovereigns for over a quarter of this year, as they were providing a higher yield than other global developed market sovereigns. This high demand had pushed Treasury yields down and investment-grade corporate bond yields had fallen along with them.
With investors having an option to invest in European bonds again, some of the earlier interest has waned, both in Treasuries and corporate bonds.
In 2014, corporate bond yields touched a high of 3.33% according to the BofA Merrill Lynch US Corporate Master Effective Yield. So far in 2015, the highest yield the indicator has seen was 3.18% on January 2. Until May 15, 2015, yields ranged between 2.84% and 3.15%. They have remained above the 3.0% level since the end of April.
The BofA Merrill Lynch Option-Adjusted Spread (or OAS) measures the average difference in yields between investment-grade bonds and Treasuries. Securities selected for calculating this spread are the ones which are rated BBB- or higher on the S&P rating scale.
If spreads are rising or widening, credit conditions can be assumed to be worsening. Spreads widen also when growth is slow and economic conditions are worsening. Conversely, falling or tightening spreads coincide with faster growth, and generally better economic conditions.
In 2014, spreads by this measure had ranged between 1.06% and 1.51%. Until May 15, 2015, spreads have ranged between 1.29% and 1.53%. Spreads have fallen as the year has progressed. The OAS had averaged 1.50% in January 2015. The average fell to 1.43% in February, to 1.35% in March, and to 1.33% in April. In May 2015, spreads averaged 1.33%. Further, spreads are down 11 basis points from levels at the end of December 2014.