Graphic: Could investment-grade yields keep rising?
The bond market seems more focused on macroeconomic factors such as inflation than a potential government shutdown — postponed for now. Following the recent Federal Reserve meeting, the expectation is for elevated short-term interest rates to persist. That, combined with skyrocketing longer-term Treasury yields, will hurt corporate investment-grade returns. Should economic growth slow, widening spreads could further diminish returns.
Shutdown effects: During past shutdowns longer-term Treasury yields fell, but recently, yields have risen, with the 10-year at 4.73% on Oct. 4 vs. 4.25% in mid-September. The investment-grade spread also rose, to 126 basis points from 121. S&P and Fitch no longer have a AAA rating on the U.S., and Moody's warned a November shutdown may cause it to lower the rating.
Treasury yields and investment-grade spreads during major shutdowns
Long-term picture: A-rated bonds — which make up 32.4% of the investment-grade universe — yielded 6.03%, and BBB-rated bonds — which make up 56.5% — yielded 6.44% as of Oct. 4, with spreads of 111 and 152 basis points, respectively. While those yields seem attractive, spreads could widen should the economy significantly slow. For example, in 2008 A-rated spreads neared 600 basis points and BBB-rated spreads eclipsed 700.
Corporate investment-grade spreads and yields
Returns still negative: A-rated corporate bonds have lost 1.5% this year, as of Oct. 4, after losing 15.1% last year. This year, BBB-rated bonds have returned -0.3% following a 15.9% loss in 2022.
Corporate investment-grade returns by rating
Sources: U.S. Department of the Treasury, Bloomberg LP, Fitch Ratings