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Capital Ideas

Investment insights from Capital Group

Categories
Bonds
Long duration credit update for the first quarter of 2021
Greg Garrett
Investment Director

Investors were given more reasons to be optimistic about the economic outlook during the first quarter, and that optimism was clearly reflected in bond markets. The COVID-19 vaccination program ramped up in earnest, President Joe Biden signed a $1.9 trillion economic relief package and Federal Reserve officials made clear in several speeches and testimonies that policy rates were unlikely to change through 2023. The shift in economic outlook drove long-end U.S. Treasury rates sharply higher.


U.S. long investment-grade bonds

Spreads narrowed as yields pushed higher

Chart shows the option-adjusted spread and yield to worst for U.S. long investment-grade bonds, and 10-year and 30-year U.S. Treasury yields. Option-adjusted spread and yield to worst are calculated for the Bloomberg Barclays Long U.S. Corporate Index. Data shown are from March 31, 2020, through March 31, 2021. The chart shows a significant decline in the option-adjusted spread to 125 basis points from 274 basis points over the full period, including a decline of 15 basis points in the first quarter of 2021. Yield to worst rose to 3.45% from 2.78% during the first quarter, but it was down from 3.87% a year earlier. The 10-year and 30-year U.S. Treasury yields both rose significantly in the first quarter. The 10-year ended at 1.74%, up from 0.93% at the start of the first quarter and 0.70% on March 31, 2020. The 30-year ended at 2.41%, up from 1.65% at the start of the first quarter and 1.35% on March 31, 2020. Sources: Bloomberg Index Services Ltd., Refinitiv Datastream. As of March 31, 2021.

Option-adjusted spread and yield to worst calculated for the Bloomberg Barclays Long U.S. Corporate Index as of March 31, 2021.

Sources: Bloomberg Index Services Ltd., Refinitiv Datastream. As of March 31, 2021.

Higher government bond yields resulted in a negative return for the Capital Group Long Duration Credit Composite, which lagged the negative return of the benchmark Bloomberg Barclays U.S. Long Credit Index. Relative results reflected the portfolio’s underweight exposure to credit risk in a period when long duration spreads tightened by 15 basis points. Issuer selection was the most significant drag on relative returns, primarily due to the portfolio being underweight or not owning key credits in the banking and consumer noncyclical sectors. 


The portfolio managers still view the U.S. investment-grade corporate market as being richly valued relative to fundamentals and leverage levels. Thus, they are remaining both conservative and selective in their approach.



Greg Garrett is an investment director with 33 years of industry experience (as of 12/31/20). He holds a bachelor’s degree in finance from the University of Arizona.


This investment strategy update and related material are designed for use solely by Qualified Purchasers, institutional investors and consultants.

Bloomberg® is a trademark of Bloomberg Finance L.P. (collectively with its affiliates, “Bloomberg”). Barclays® is a trademark of BarclaysBank Plc (collectively with its affiliates, “Barclays”), used under license. Neither Bloomberg nor Barclays approves or endorses this material, guarantees the accuracy or completeness of any information herein and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.

Bloomberg Barclays U.S. Long Credit Index is a market-value-weighted index that tracks the total return results of publicly issued U.S. corporate and specified foreign debentures and secured notes that meet the specified maturity, liquidity, and quality requirements, with maturities of 10 years or more. To qualify, bonds must be SEC-registered and must be an investment-grade security. This index is unmanaged, and its results include reinvested distributions but do not reflect the effect of sales charges, account fees, expenses or U.S. federal income taxes.

Market indexes are unmanaged and, therefore, have no expenses. Investors cannot invest directly in an index.

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