MW Here's an oasis of calm in markets, despite jitters about rising 10-year Treasury yields

By Joy Wiltermuth

Investment-grade corporate bonds are holding fairly steady, despite volatility in rates and equities

Highly rated U.S. corporate bonds have been an oasis of relative calm this week, despite jitters around November's election taking hold of stocks and the Treasury market.

Spreads on investment-grade corporate bonds have been edging only modestly higher from historical lows, even as the stock market retreated Wednesday and the 10-year Treasury yield BX:TMUBMUSD10Y ended at 4.24%, the highest level in about three months.

The below chart from BondCliQ shows how low corporate bond spreads have gone in recent weeks (green line), even as climbing longer-duration Treasury yields have pushed nominal yields (yellow line) up since mid-September, signaling meatier coupon rates for investors.

"The yield buyers are very happy," said Bryce Doty, a senior portfolio manager at Sit Investment Associates on Wednesday. "Just recently though, we are starting to see spreads widen a little bit."

Spreads are the extra level of compensation investors receive on bonds above the corresponding Treasury rate to compensate for things like default risks and market tumult. Highly rated U.S. companies would be considered a relatively low default risk, especially with the economy showing resilience in recent weeks, despite still-high interest rates.

Doty at Sit said jitters gripping markets at midweek likely stem from a fear that the 10-year Treasury could be approaching a level that could be a pain point for the economy.

"Anything that puts the Fed rate cuts in jeopardy is a problem," he said, adding that "good news" on the economy could look like "bad news" for markets.

Still, Doty expects a soft landing, with the Fed cutting interest rates by 25 basis points at its two remaining policy meetings this year, and thereafter to follow in the Bank of Canada's path and issue another 50-basis-point cut.

The large iShares iBoxx $ Investment Grade Corporate Bond ETF LQD fell 0.2% on Wednesday, while the Dow Jones Industrial Average DJIA shed 1%, the S&P 500 index SPX fell 0.9% and the Nasdaq Composite COMP closed 1.6% lower, according to FactSet.

-Joy Wiltermuth

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October 24, 2024 07:02 ET (11:02 GMT)

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