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.
Mutual funds (MFs) like the Vanguard Total Bond Market Index Inv (VBMFX) and the Ivy Limited-Term Bond A (WLTAX) help you invest in these instruments. The Vanguard Total Bond Market Index Inv (VBMFX) invests in the investment-grade corporate bonds of companies such as American Airlines Group (AAL), Nike (NKE), and General Electric (GE).
Yield movement in 2015 so far
The first four months of 2015 had seen yields on investment-grade corporate bonds fall, according to the BofA Merrill Lynch US Corporate Master Effective Yield. Safe-haven demand for these bonds—along with the higher yield that they were providing compared to the similarly rated instruments of other developed countries—had led to a fall in yields. Yields on investment-grade corporate bonds had fallen to a low of 2.84% by mid-April. US corporates and financials thronged the primary bond market in the United States due to these low yield levels.
Since April’s end, yields have risen, though their level still remained lower than in 2014. But June broke the low-level trend in yields—a trend that continued into August. Yields rose to as high as 3.41% on August 5. This was not only the highest level in 2015 year-to-date but it was also the highest level since September 20, 2013.
In June, developments in Greece significantly influenced yield movement. However, for the last two weeks, some focus has returned to US economic fundamentals that could affect the rate hike’s timing.
Spreads in 2015
The BofA Merrill Lynch Option-Adjusted Spread (or OAS) measures the average difference in yields between investment-grade bonds and Treasuries. The securities selected for calculating this spread are rated BBB- or higher on S&P’s rating scale.
If spreads are rising or widening, you can assume that credit conditions are worsening. Spreads also widen when growth is slow and economic conditions are worsening. Conversely, falling or tightening spreads coincide with faster growth and, generally, with better economic conditions.
In 2014, spreads by this measure had ranged between 1.06% and 1.51%. Until August 7, 2015, spreads had ranged between 1.29% and 1.60%. Spreads had fallen as the year progressed, except in May, June, and now July. 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. However, in May 2015, spreads averaged 1.34%. In June, they averaged 1.42%. And in July, the average was 1.51%. August 7 recorded the highest spread of 1.60%. Further, spreads are up 16 basis points compared to the end of December 2014.