Investment-grade bond yields
Yields on investment-grade corporate bonds, as measured by BofA Merrill Lynch US Corporate Master Effective Yield, have been 2.8%–3.5%. By this measure, April was the last month when the yields were below the 3.0% level. Meanwhile, the yields on high-yield, or junk bonds, have been over the 200 basis point trading range YTD (year-to-date) in 2015.
Yields, as measured by the BofA Merrill Lynch US High Yield Master II Effective Yield, have been 6%–8.2% YTD in 2015. For both investment-grade corporate and junk bonds, the yields rose since May 2015. October has been kind to them. The yields stand at the 3.3% level for investment-grade bonds and 7.5% for junk bonds. They’re elevated, but down from the multiyear highs that were touched in September.
Bond indices lagged after the yuan devaluation
The S&P/BGCantor U.S. Treasury Bond Index measures the performance of the US Treasury market. The S&P U.S. Aggregate Bond Index measures the performance of US dollar denominated investment-grade bonds. If we look at these indices’ performance compared to stock market indices’ performance since the 1,000 point fall in the DJIA (Dow Jones Industrial Average) on August 24, as worries regarding China gripped the markets, the DJIA rose 11.3% until October 30. The S&P 500 rose 9.8%.
The S&P/BGCantor U.S. Treasury Bond Index fell 0.36% during this period. The S&P U.S. Aggregate Bond Index was flat from August 24 until October 30.
Bonds have been the right asset class in 2015
So far, bonds (ADFAX) (TBILX) have outperformed stocks this year. The S&P/BGCantor U.S. Treasury Bond Index rose 1.1% in 2015 until October 30. During the same period, the S&P U.S. Aggregate Bond Index has returned 1.2%. Meanwhile, the S&P 500 rose ~1.0% during the period. The DJIA fell 0.9%.
Concerns about an additional rise in the yields led to corporates like Microsoft (MSFT), Mead Johnson Nutrition (MJN), and financials like PNC Financial Services Group (PNC) and Capital One Financial (COF) hitting the primary bond market to raise capital.
In the next part, we’ll see how the interest rate environment can take shape going forward.