Investment-grade corporate bonds are debt instruments rated BBB- and above by rating major Standard & Poor’s. Other rating agencies have their own scale of rating a corporate bond as investment-grade. Treasuries are also considered investment-grade.
Exchange-traded funds such as the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) allow you to invest in these instruments. LQD invests in the investment-grade corporate bonds of companies including Apple (AAPL), General Electric (GE), and Medtronic (MDT). Meanwhile, ETFs including the iShares 7-10 Year Treasury Bond ETF (IEF) invest exclusively in Treasuries.
Yield movement in 2015 so far
The first four months of 2015 saw yields on investment-grade corporate bonds fall, according to the BofA Merrill Lynch US Corporate Master Effective Yield. Corporate bonds offer a higher yield than similarly rated instruments from other developed nations, which made them appealing to investors seeking a safe haven. So safe-haven demand for these bonds led to the fall.
Yields on investment-grade corporate bonds fell to a low of 2.84% in mid-April. US corporates and financials thronged the primary US bond market due to these low yield levels.
From the end of April, yields began to see somewhat of a rising trend, though levels remained lower than they were in 2014. It wasn’t until June that the low-level trend in yields was broken, and this new trend has continued into July. Yields rose to as high as 3.4% on July 13, the highest level in 2015 year-to date and the highest level since September 19, 2013.
Since June, developments in Greece have influenced yield movement in a big way. Last week, some focus returned to US economic fundamentals, which could potentially impact the timing of a rate hike.
Spreads in 2015
The BofA Merrill Lynch Option-Adjusted Spread, or OAS, measures the average difference between investment-grade bond and Treasury yields. Securities selected for calculating this spread are ones that are rated BBB- or higher on the Standard & Poor’s rating scale.
If spreads are rising or widening, credit conditions are assumed to be worsening. Spreads also widen 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, the OAS ranged between 1.06% and 1.51%. As of July 17, 2015, spreads have ranged between 1.29% and 1.53% year-to-date.
Spreads have fallen as the year has progressed, except in May, June, and now, July. The OAS averaged 1.5% 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, however, spreads averaged 1.34%, and in June, 1.42%. As of July 17, spreads have averaged 1.48%. What’s more, spreads have risen by six basis points compared to the end of December 2014.