The Resiliency of Corporate Bonds

Last week, bond yields continued their march higher as the markets digested higher inflation surprises and the prospects for higher Treasury issuance. The yield curve shifted higher almost in parallel fashion, with 2Y and 10Y yields rising by 10 basis points each, to 4.99% and 4.62%, respectively. The 30Y bond yield moved higher by 9 basis points to end the week at 4.71%.?

We believe a potential catalyst for the US fixed income universe is the Treasury's Quarterly Refunding Announcement (QRA) next Wednesday on May 1st. Fiscal concerns have become a prime factor for markets due to the tremendous amount of government spending since Covid. At the Treasury's prior QRA on January 31st, it increased its coupon bond issuance amount, while stating that "Based on current projected borrowing needs, the Treasury does not anticipate needing to make any further increases in nominal coupon or FRN auction sizes, beyond those being announced today, for at least the next several quarters."?Next week we will be focused on whether the Treasury alters its coupon bond profile.

It's no doubt that increased coupon bond issuance has been a factor in rising yields, and rising term premium, since January 31st, in addition to the repricing of Fed expectations.?

The last few weeks have seen the first true "risk off" tone this year, with the S&P 500 experiencing a 3% drawdown last week – the largest drawdown for the index since the Silicon Valley Bank crisis in March 2023. However, corporate?credit spreads remain extremely well behaved, with the investment grade corporate spread widening by only 3 basis points on the week and high yield spreads rising by 13 basis points. The all-in yield of corporate bonds is contributing to the stable demand and resiliency of corporates, which will continue until fundamentals weaken markedly through downside surprises in growth and earnings data. The chart below shows the relative yields of investment grade corporate bonds and equities earnings, which explains the continued bid for fixed income amid higher equity volatility.?

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