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Long duration credit update for the third quarter of 2020
Greg Garrett
Fixed Income Investment Director
October 28, 2020

While all recessions have unique characteristics, the current downturn has had a very unusual catalyst in the coronavirus pandemic. Markets have taken solace in the liquidity provided by central banks, and companies have been able to issue debt at record levels in 2020.  Investment-grade bond spreads tightened 14 basis points (bps) to 136 bps on an option-adjusted basis during the third quarter, but that mostly took place in July. Economic news has been mixed, likely contributing to the range-bound nature of corporate bond spreads for the rest of the quarter.


U.S. long investment-grade bonds

Credit spreads narrowed slightly in 3Q

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 from September 30, 2019 through September 30, 2020. The chart shows significant spikes in the option-adjusted spread and yield to worst, along with sharp declines in Treasury yields in March 2020. The option-adjusted spread ended the second quarter of 2020 at 202 basis points and reached a third-quarter low of 173 basis points on August 11, 2020. It then moved into a higher range between 179 and 192 basis points and ended the quarter at 188 basis points. The yield to worst ended the second quarter of 2020 at 3.17% and reached a third-quarter low of 2.73% on August 6, 2020. It then moved into a higher range between 2.90% and 3.08% and ended the quarter at 3.06%. The Treasury yields declined steadily in July, then moved into a higher range for the rest of the quarter. The 10-year yield was 0.66% on June 30, 2020, ended July at 0.55%, reached a low for the quarter of 0.52% on August 4, 2020, then moved in a range between 0.64% and 0.74% from August 11, 2020 through September 30, 2020. It ended the quarter at 0.69%. The 30-year yield was 1.41% on June 30, 2020, ended July at 1.20%, reached a low for the quarter of 1.19% on August 4, 2020, then moved in a range between 1.32% and 1.52% from August 11, 2020 through September 30, 2020. It ended the quarter at 1.46%. Sources: Bloomberg Index Services Ltd., Refinitiv Datastream. As of September 30, 2020.


The Capital Group Long Duration Credit Composite rose in absolute terms during the quarter but trailed the benchmark Bloomberg Barclays U.S. Long Credit Index. A few utilities sector holdings exposed to California wildfire risk weighed on relative returns from issuer selection during the third quarter. This was mostly offset by strong issuer selection in the energy sector.


At current elevated valuations, investment-grade corporate bonds generally reflect much of the upside in potential economic activity but very little of the risks on the horizon, including uncertainties related to the path of the virus and the looming U.S. election. 


Greg Garrett is an Investment Director for credit and long duration strategies with 32 years of industry experience as of December 31, 2019. He holds a bachelor’s degree in finance from the University of Arizona.

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