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Categories
Bonds
Long duration credit update for the fourth quarter of 2020
Greg Garrett
Investment Director

Spreads on investment-grade bonds continued to tighten during the fourth quarter and ended the year only 3 basis points (bps) above where they started the year. This is remarkable given the circumstances of the prior 12 months and the massive spread widening that occurred in March. While a second wave of coronavirus infections more powerful than the first hit countries around the globe in the fourth quarter, investor sentiment was buoyed by positive clinical news regarding vaccines. In addition, a continued commitment by the Federal Reserve to easy monetary conditions supported investors’ expectations that economic activity in 2021 will significantly exceed 2020 levels.


U.S. long investment-grade bonds

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 December 31, 2019, through December 31, 2020. The chart shows significant spikes in the option-adjusted spread and yield to worst in March 2020, along with sharp declines in Treasury yields. From there, spreads and yield to worst mostly trended lower for the rest of the year. Treasury yields also trended lower until early August, then began to rise. The option-adjusted spread ended the year at 140 basis points, down from a peak of 359 basis points on March 23, 2020. Yield to worst ended the year at 2.78%, down from a peak of 4.93% on March 20, 2020. The 10-year Treasury yield ended the year at 0.93% and the 30-year Treasury yield ended the year at 1.65%, up from lows of 0.52% and 1.19%, respectively, on August 4, 2020. Sources: Bloomberg Index Services Ltd., Refinitiv Datastream. As of December 31, 2020.

The Capital Group Long Duration Credit Composite posted a positive return for the fourth quarter. But given the relatively conservative positioning of the long credit portfolios, the composite trailed the strong returns of its benchmark, the Bloomberg Barclays U.S. Long Credit Index. Sector selection was responsible for most of the lag, and security selection also had a slight negative impact. Energy holdings were the largest positive contributor, while bank holdings were the largest detractor from results relative to the benchmark. 


One technical factor that will likely be a tailwind in 2021 is that issuance is expected to be significantly lower.  However, central bank policies have inflated financial asset prices, and at current spread levels investors are receiving little compensation for any potential risks. Thus, this is a time to be patient. While there is likely to be better economic news ahead, a remarkable amount of good news is already reflected in bond prices.



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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