The yield attainable on new positions has become more appealing. (ddp)

On the flip side, the yield attainable on new positions has become more appealing. The bond market pricing in an increased number of Fed hikes has caused a large upward adjustment on the short end of the Treasury curve. For investment grade (IG) corporate bonds, credit spreads for 1–3 year maturities are also about 7–12bps wider this year. This has amounted to 1–3 IG bond yields that are 80–85bps higher, averaging 1.9% for those with A-ratings and 2.25% for BBB's.

As discussed in the Blog: Going back to the basics, fixed income investors should use the short end of the curve for carry since their bond prices are less sensitive to yield fluctuations relative to longer maturities. We view 1–3 year BBB's as a way to achieve extra carry with relatively low risk. In addition to now offering yields above 2%, investors pick up more credit spread by moving from A‘s to BBBs at the short end vs. in longer maturities. Second, 1–3 year BBB's can withstand a 125 bps rise in interest rates before wiping out the current income investors earn over 12 months. This compares with only a 40bps rise in rates for the IG index as a whole. Third, the dollar prices on secondary bonds has declined, providing more options for investors who seek out issues that are priced closer to par or at discounts.

Main contributor: Barry McAlinden, CFA, Sr. Credit Strategist Americas

Content is a product of the Chief Investment Office (CIO).

Original report - Conventional yield has come back, 17 February, 2022.