High-Grade Bonds Look Bulletproof With Spread Tightest in Decade

What selloff? Investors in U.S. investment-grade corporate bonds don’t seem to care what’s happening in the broader market as spreads hold at their tightest level in more than 10 years.

The Bloomberg Barclays U.S. investment grade bond index has fallen to 85 basis points, the lowest level since February 2007, even as Treasury yields rose nearly 20 basis points last week and the S&P 500 Index saw its worst weekly loss in two years.

“Two months of slow new issuance, coupled with good economic data and the potential tailwind of tax reform have all allowed investment grade credit spreads to do well,” Peter Tchir, the head of macro strategy at Academy Securities Inc., wrote in a note. “Even higher Treasury yields have so far only made it easier for investors to buy investment grade bonds and achieve their yield targets.”

Investment-grade bond spreads have tightened partly as a result of companies holding off on selling debt amid a jump in benchmark rates, which have risen due to concerns that accelerating inflation could lead to a faster pace of hikes by the Federal Reserve. The pause in issuance comes after firms rushed to borrow while it was cheap.

High-grade debt spreads have tightened by two basis points a week since mid-November and reached the tightest since the post-financial crisis period, driven by higher 10-year Treasury yields, Eric Beinstein, JPMorgan Chase & Co.’s head of U.S. high-grade strategy, wrote in a report.

“The accelerated Treasury selloff has caused a spread rally slowdown recently,” he wrote. “We believe Treasury volatility represents the main risk in the near term.”

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE